Charter Hall Group (CHC) Earnings Call Transcript & Summary

Welcome, everyone, to today's virtual development showcase. My name is David Harrison, and I'd like to thank you all for your time this afternoon. We'll start proceedings today by providing an overview of development at Charter Hall and a discussion of our development framework. Then I'll hand over to Carmel Hourigan, our Office CEO, who will discuss the role of development within our office business and portfolios. Carmel will then hand over to Andrew Borger, our Head of Office Development, who'll run through some case studies of our developments and our future development priorities in more detail. After Andrew is finished, we'll then stop for Q&A on office development. Post-Q&A, we'll look at the industrial and logistics business. Richard Stacker, our Industrial and Logistics CEO, will run through development and its important role in the industrial and logistics funds. Who'll then hand over to Andrew Simons, our Head of I&L development, to run through some case studies for industrial development and talk through our future development priorities. We'll then take questions on our industrial and logistics business, and that will be the conclusion of our session. Anyone who's followed Charter Hall for any length of time, will be familiar with our access, deploy, manage and invest strategic framework. It's also useful lens for reviewing our development business. Our development pipeline and track record of successfully delivering new investment stock to our funds is a key attractor of capital. And development, complementing our net acquisitions is essentially our deploy strategic pillar. It improves the average age of our assets. It reduces obsolescence risk, and the access to development gains further enhances the appeal of our funds for our capital partners. Our ability to deploy capital into our pipeline of off-market opportunities sourced by our in-house development and transaction teams stands us apart from many of our peers. We then manage those developments with an appropriate risk framework that derisk the developments and process. Importantly, we're invested in the outcome. As a co-investor in the funds and partnerships, we also share in the benefits through improved returns on our balance sheet capital. As you can see from this slide, development completions account for almost $5 billion of our fund growth over last 5 years. Post-revaluations, that number is considered probably higher. Office developments make up $2.8 billion of that total and generally larger projects that are lumpier in nature, given it takes on average 3 years to deliver a project. We have a large pipeline here of $2.25 billion of committed developments that will underpin significant delivery in future years. Industrial and logistics has grown significantly to be $1.7 billion of completions. Given the growth in our workbook, our expectation is that future completions for the next few years will be at least $500 million per annum. Finally, our Long WALE retail developments reflect our strong relationships with tenants like Bunnings and Endeavor Drinks and our partnerships with them and the investors in those funds to grow alongside these tenant customers. Turning to Slide 6 you can see our pipeline of committed and uncommitted developments. Committed developments are those projects that have been pre-leased and construction has commenced. You can see from the chart that our committed projects totaled $3.6 billion, and deliveries weighted to the office and industrial sectors. It's also well diversified across our funds without undue concentration in any one fund or partnership, reflecting the core plus nature of our funds. Our uncommitted pipeline consists of development land in our industrial and logistics funds and existing office sites that are either D.A. approved or D.A. submitted and seeking pre-commitments for new developments in our office funds. Again, the $3.4 billion pipeline is well diversified across funds and geographies and markets. I know there are probably some questions about why you'd look to develop an office now, given the current flux in office markets. What this slide demonstrates is that there is still a healthy precommitment market in office, dominated by financial service firms and Charter Hall has deliberately targeted government tenants and accounts for 45% of national government office pre-lease projects under construction. Carmel and Andrew will talk to this in more detail. But we continue to see leasing demand from large space users as a result of their desire for consolidation, centralization and tenants looking to take advantage of market conditions and trade up to space in newer developments. Turning now to industrial and logistics and some of the trends underpinning our development activity. It's not new news to anyone, but COVID was a significant accelerant of online retail sales penetration. As you can see in the chart on the left, the impact of COVID was equivalent of 4 to 6 years online growth all in 1 year. There were already strong structural forces underpinning logistics demand, and COVID has delivered these as a significant boost. You can see that in the growth in goods consumption, COVID-19 was a goods recession. It was -- sorry, it wasn't a goods recession. It was a services recession. Again, this is a significant ongoing implications for industrial and logistics demand. Now when you look at specifically at food retailing, we had a massive surge as a result of COVID and has still not returned to pre-COVID trend levels. As a percentage of total sales, food turnover makes up 41% of total retail turnover, both before and after the COVID impacts. We have deliberately targeted food retailing and the supermarket sector within our industrial and logistics business, given the size of the market and it's defensive nature. Andrew Simons will talk to this in more detail. But we are the largest owner of logistics assets for the major supermarket chains in Australia. Approximately 1/3 of our $12 billion-plus industrial portfolio is leased to Coles, Woolworths, ALDI and Metcash. And this makes up 6x the size of our nearest competitor in this space. Other trends worth noting are the disruptions to supply chains that have seen higher stock inventory levels and onshoring of some essential manufacturing. Data centers are also an important growing channel of additional demand. All of these trends have translated into strong demand for industrial and logistics facilities, and Charter Hall remains well placed to meet this demand through our developed to core capabilities. I'll spend some time talking to the market -- all the market factors underpinning demand. The new development stock in office and industrial and Charter Hall is positioning to meet that demand. I'd now like to talk to Charter's competitive advantage in being able to secure new development stock. We look to partner with the leading tenants in each sector. Then we look to utilize our tenant relationships, growing with our tenant customers to meet their property needs. If we've done this well, then we have a really good understanding of their business, which means we often see opportunities to put compelling development offerings in front of them that further advance their business goals. Importantly, we try and do this for all their property needs. So even if they're only a customer in 1 sector, we don't limit our thinking to just that sector. And internally, we look for opportunities to grow tenant customers across all sectors. It's this holistic thinking about tenant needs that gives us an advantage when we sit down in front of our tenants and is responsible for securing a large portion of our off-market pre-lease developments. Rounding out my discussion of the development framework at Charter Hall is a brief slide on development investments. As many of you would know, in FY '19, we reported development investment EBITDA following the acquisition of the Folkestone platform. Since then, we've had a small portion of the group balance sheet invested in development projects that sit outside our traditional funds and partnership appetite. Typically, many of our funds prefer not to take leasing or delivery risk. In these cases, CHC will wrap the development as a developer, sometimes with a partner like Western Sydney University, where post-signing a fixed-price contract with a builder CHC will have a fund or partnership, purchase the land and fund development progress payments with CHC taking on residual leasing and delivery risk. In this instance, CHC would recognize profits on a cost to complete basis as pre-leasing moves towards 100%. Where, for example, if we provide a 3-year rent guarantee on uncommitted space, CHC would not recognize profits in development investment earnings beyond the residual rent guarantee liability. This concept occurs in less than 20% of our total development projects given the majority of developments within the group sit within our larger funds that do have the development appetite and a mandate such as CPOF in [ Charter ] office or CPF in industrial. Where appropriate, the group looks to take an initial development ownership position, originating side opportunities via options or conditional contracts before transferring these positions to the funds. When they have been sufficiently derisked by planning approvals and pre-leasing. The earnings derived from these investments don't represent a large portion of total group revenue, but do represent an attractive earnings stream, adjacent to our existing development activities and provide a strong return on equity. We expect that these earnings will be an ongoing contributor to the group in the future. I'll now hand over to our Office CEO, Carmel Hourigan.

Thanks, David. Development is a key element of our fund and asset management strategy. Of last 5 years, Charter Hall has completed close to $2.8 billion worth of office development, which has significantly contributed to the outperformance of the office funds. Build to core strategies and enhancement of existing assets are essential components in how we drive alpha across our core and value funds. The ability to create is seen by investors, particularly global investors, as an avenue to achieve entry into a tightly held market for high-quality new product. At Charter Hall, we've always had a very disciplined approach to portfolio curation, incorporating development and divestment and acquisition strategies to drive performance. This has translated into $13 billion of transactions in the last 5 years with the group managing 74 assets spread over 1.6 million square meters. It's clear post-COVID and in a lower growth environment, this discipline will be more important as we look to renew the portfolio in favor of higher quality and sustainable product, continue to deliver outperformance against benchmark, pivot towards Longer WALE blue-chip covenants and fix escalators and importantly, increase the attractiveness of our funds, promote liquidity and diversification of the investor base. To achieve this, we need deep expertise. And as shown here, we have a team of 140 commercial specialists to deliver this strategy. Charter hall has a regional model with specialists located in every capital city with experience in funds, asset and development management. We see local knowledge as essential to our success and having development and at asset specialists in each region allows us to understand our markets deeply, be close to our customers and secure opportunities. This chart provides a snapshot of where Charter Hall opposites in comparison to market peers. In Australia, we managed $21.2 billion in office properties and are the largest third-party capital manager. Importantly, we develop within our funds, and we don't compete with our balance sheet. We have a large national presence, however, are heavily weighted to the key eastern seaboard markets with large overweight positions in Sydney and Melbourne. We remain opportunity-led in other markets, subject to those opportunities reflecting key fundamentals, such as quality, covenant and WALE. An example here is our recent increase in exposure to South Australia with the new development at 60 King William Street, providing Long WALE and government exposure. As David touched on, a key strategic advantage is the quality of the income of our portfolio, and we have a market-leading exposure to government tenants, which account for around 26% of the office portfolio income across the platform. This provides a strong foundation with annual escalators averaging 3.6% per annum. And post-COVID, we are continuing to increase our exposure to other growth sectors, such as technology and health with the commitment of Amazon at 2 Market and 555 Collins Street, reflecting this growth. As a team across sectors, we are very focused unlocking potential to drive the best outcome for our investors and customers. The ability to unlock customers across sector and secure repeat business is an opportunity that differs from the peer set and attracts a disproportionate share of capital in the market. We also enjoyed the Longest WALE of all the office portfolio at 6.7 years, which we see as critical over the medium term. Development plays an important role in maintaining these advantages. But when it comes down to it, we are here for really 1 reason, and that is to drive performance for our investors. We get this right and the risk can fall into place. And this chart shows the outperformance of our flagship Charter Hall office fund over 5, 7 and 10 years against peers and MSCI. Over multiple time frames, upside from development profit has played a role in edging ahead of the peer group for CPOF. Current capital demand continues to be interested in fund and investment strategies, which deliver alpha returns in office. Recent discussions with international capital see build-to-core strategies as a way to access high-quality assets with blue-chip covenants and an attractive yield on cost relative to cap rate. The development pipeline can provide the embedded value that investors are seeking and results in increase capital flow. CPOF is a great case study when assessing the value development and active strategies can bring to investors. Since 2006, CPOF has delivered $1.9 billion of value creation above contributed equity. This chart shows the combination of strategies we use to drive performance and tactically shift to high-quality modern assets through time. The gray line is cumulative contributed equity; the black line is NTA movement; and the GAV is the blue line. The dots represent acquisitions, divestments and development activity. You can see from the chart that developed to core call, the green dots, has been an integral part of the fund's history, and this has driven significant return performance. A total of 25% of the $1.9 billion has come from development. You can also see that the development pipeline, the blue dots, will be an important part of the fund's future delivery. What's also evident is that we've actively curated the portfolio with acquisitions and disposals in CPOF totaling $6.5 billion since 2006. This disciplined curation strategy will continue as we shape portfolios towards assets, which offer amenity, collaboration and well-being attributes to staff and customers. This chart looks at CPOF's annual total return. Development returns have enhanced CPOF's performance and contributed an average of 25% to annual returns over the last 5 years. Within this overall performance is also valuation upside going through enhancement and repositioning strategies on existing assets. Both the development and asset management teams play an active role across our strategic pillars of transact, create and enhance. All of our acquisitions are assessed through a development refurbishment framework, looking at future value-add opportunities that might exist in addition to the stabilized return. An example of this is the focus on precinct acquisitions such as Wesley Place in Melbourne and 555 Collins Street, where we look to build community in a prime location across multiple buildings we control. Another recent example of refurbishment enhancement is the repositioning of 2 Market Street in Sydney and the re-leasing of the Allianz floors to Amazon, which led to a $50 million valuation gain on a 100% basis. This slide reinforces the importance of delivering consistent alpha strategies over time and a need to focus on replenishing the development pipeline to drive market outperformance. When we do this, we are always assessing risk and reward with a focus on the level of commitment, the location, market fundamentals and importantly, the delivery partner. While there are undoubtedly structural changes that may occur due to COVID, we believe most of the current forces affecting the office market are cyclical and a result of the recent recession. We remain cautiously optimistic with recent economic data pointing to a continuation of the recovery, which will be positive for office markets. Our expectation is that we'll continue to see a return to work, and this is shown in the PCA stats of occupancy, which continue to improve. On the ground, we are seeing a pickup in tenant inquiry with a lift in leasing activity in the sub 1,000 square meter market, particularly for space that's already fitted out. We've seen an increase in the number of RFPs in the market for space greater than 1,000 square meters as tenants look to reengage after putting a lot of their activity on hold last year. Within these large RFPs, government and finance tenants account for a large proportion. And while these RFPs don't necessarily involve expansion space, they generally requirements for an equivalent amount of space, suggesting concerns about downsizing in response to COVID are somewhat overplayed. However, we remain cautious and continue to assume that leasing markets will remain tough for the next 2 years. We are seeing increased consolidation with tenants in many instances looking to take advantage of available space. And locating from multiple locations. And keeping in mind, prior to COVID, vacancies were extremely tight in the eastern seaboard CBD markets. One of the key thematics we're seeing is the flash to quality. And you can see in the chart in the bottom right-hand corner, the growth in occupied prime grade stock has been on a continual upward trend through all the cycles we've been through. This push to occupy better stock leads to an element of structural vacancy in older stock. You can see this in the chart on the bottom left, where the vacancy of stock by market shows the clear gap between vacancy for buildings over 10 years old versus those under 10 years of age. Looking at the chart on the top right, when you look at the average prime grade building age across the major East Coast markets, it's approximately 20 years. By contrast, the average age of buildings in CPOF and CHOT is generally well inside of that in most markets. And that's an important part of the reason that CPOF and CHOT vacancy are sitting at 3.3% and 3.4%, respectively. And therefore, it's important for us to continue to curate the portfolios we manage, selling older stock at risk of obsolescence, and selectively developing appropriate new buildings in our funds, improving the overall quality and increasing the portfolio WALEs. You can see here a selection of some of our most recent developments. All of these projects resulted in a reduction in the average age of our portfolios, an improvement in WALE and stronger performance. These examples also reflect our expertise in both suburban and CBD markets. You can see a mix in this pipeline. We think it will be -- continue to be important to have the expertise to develop in different markets in the event we see an increase in hub and spoke models. Our education strategy, where we now have $1 billion underdevelopment and completed all outside of the CBD, is another example of where this expertise is essential. As shown here, all projects delivered have been close to 100% leased on completion and averaged a WALE of 11.2 years. Importantly, they have delivered significant valuation gains. Over the last 5 years, Charter Hall office development projects have delivered an average 25.6% project IRR. We expect to see further tightening in cap rates for these types of assets in the near-term as investors seek long-dated leases with fixed escalators. Our most recent CPOF valuation cycle reflected this. With assets with a WALE greater than 7 years, having a valuation gain of 3.5% over the 12 months to December 2020 versus negative 1.5% for WALE less than 7 years. Andrew will discuss some of our key strategies in more detail and new opportunities we are looking at. Before I pass on to Andrew Borger, our Head of Office Development, I wanted to touch on the importance of cross-sector customer relationships. As David has already discussed, a key part of our success as a developer is leveraging our tenant relationships and looking to grow with our tenant customers. And this slide shows a few great examples of this. The 140 Lonsdale development will be a modern A grade office building designed to meet the needs of the AFP in Melbourne for the next 30 years. This precommitment grew out of a tenant relationship that started in our industrial and logistics business and is a great example of how we use our cross-sector abilities to provide solutions for our tenant customers. Similarly, our relationship with Amazon initially began with the tenancy in 2 Park Street. From this, it grew into an additional lease at 2 Market Street and now to them precommitting our 555 Collins Street development in Melbourne. This focus on working with leading tenant customers and looking to meet their needs across different sectors and property types is an advantage we need for Charter Hall. It's an important attractor of capital to our funds and drives much of our development activity. I'd now like to hand over to our Head of Office Development, Andrew Borger. Thank you.

Thanks, Carmel. You provided a really good context from an office and from a fund perspective in relation to the role of development. Today, I'll be taking you through at a more granular level, the way we see strategy playing out for Charter Hall in office development, some case studies and some opportunities in the sector going forward. Within development, we play 4 key roles within the business to identify, secure and convert and deliver develop to core opportunities to provide superior returns and product for our funds. In relation to how we do this, we do these 7 key ways. Our ability to add value to our existing portfolio. As an example in relation to that, would be our recently completed Raine Square project in Perth, where we had a significant existing office investment. And over the last 3 years, we've significantly changed the whole retail context there by bringing in food and beverage, a dining precinct and most recently, a luxury retail components to that project. Another example would be 570 Bourke Street in Melbourne, an existing A grade asset that has had the ability to go ahead an additional amount of NLA, and upgrade the entire building. So we have a significant ability to bring into for funds. The ability to assess add value opportunities and then deliver on those opportunities. The second area that we work on in terms of development is to assess the potential to add value through acquisition. And most recently, we had 2 projects there, one being Chifley in Sydney and also David Jones in Sydney where on behalf of funds, we assess term planning, development potential, how we actually are going to provide additional stages over time. So that's a second component of what we do. And thirdly, we also step into the market on and off market and acquire new sites. Some good examples of that would be the recent acquisition of 555 Collins Street in Melbourne that we recently announced last year, and we're taking a [ true ] case study on that today. And fourthly, one of the key things about Charter Hall is our ability to work with our existing tenants and provide repeat business, and we'll be giving you some really strong examples of how we do that today in creating value for our funds and further opportunities for providing quality product for our tenants. Some years ago, we identified higher education particularly universities has been a really strong growth sector. And so, again, our ability to originate and deliver in this sector is a key, but also it's expanding now into life sciences, and this afternoon we'll explain that roll in life sciences as well. Traditionally, also, we provide development and delivery services. So at the moment, we're delivering over $1 billion worth of designing construction in the market, over $900 million worth of construction contracts are being signed. With all geographic markets being covered. And over $100 million are being spent on delivering those buildings, but also master planning and designing and getting planning approvals for our next wave of projects as well. And finally, the role we play for funds is to assist them where we're acquiring projects from third party developers. We play a DD, an overview role in relation to that. So 7 certain strategies we provide for funds in acquiring projects. Just moving forward then in terms of our pipeline. At the moment, we have a total pipeline of committed and uncommitted projects of in excess of $4.5 billion. At the moment, that's split roughly 50% for both components and physiologies of projects. We currently have $2.25 billion under construction. With on an NLA basis of almost 175,000 square meters, shows us being the #1 rank developer in terms of volume of projects in market underconstruction at the moment. And importantly, they have an average level of commitment of 60% across that entire portfolio. The examples we have on the screen today are aid of our current projects under construction. And what they do is they provide some of that strategic insight. If we look at 150 Lonsdale Street, it was an example of working with a group funded shop to add value to an existing asset to reposition it as part of a 1.1 Wesley Project in Melbourne. We also have on the bottom left one 141 Lonsdale Street. Previously it was a multi-day car park. We believe there was an opportunity to go a new 23,000 square meter NLA building, and then we worked on market to secure Australian Federal Police for a 30-year lease to the commonwealth government for that. That provides a very bespoke solution in relation to their forensic labs, high level of ballistics and also scientific components that build-in to provide a long-term solution for them. In relation to our focus on higher education, at the moment, we have 2 key projects under construction at the moment. 6 Hassall Street in Parramatta and iQ in Westmead are both joint venture with Western Sydney University. When we started at 6 Hassall Street. We're able to go and acquire a site there and then put a proposal to university to join venture that project. They'll now house their engineering architecture innovation center there as well as well other private sector tenants. Our iQ at Westmead is our first move into life science and again, we'll take you through a case study this afternoon. There we have 4 research institutes, including the CSR as part of that very exciting project. 555 Collins Street was another example of working with a repeat tenant in Amazon, an existing tenant that we had in 2 of our assets in Sydney, and we're now building a cross sectors for industrial, but a really important project to get away in the middle of pandemic last year. And again, we'll take you through that in high detail. 60 King William, again, represents a repeat business client with Services Australia and our company building their South Australian office of just under 29,000 square meters and that will be an amalgamation of 4 existing locations and services that are going to into 1 bespoke long-term solution in the center of Adelaide with a large component of retail as well. The following 2 projects on this slide represent third-party developers developing projects that their funds have been able to go and acquire on a prepurchase. Safecom in Adelaide will be the home for services in relation to emergency services. It's a very bespoke facility there. It has the highest level of redundancy in terms of services. And so we played a key role there of acquisition, DD and now, we're monitoring construction after practical completion of that job. And the final project is Mater, a key hospital across the country. And we now have acquired on a fund through basis, the whole administration and training facility in Brisbane as well. So they're 8 key examples we're delivering around the country, jobs under construction totaling $2.25 billion, and really reflect our strategy of being able to go and develop to hold for our funds. Beyond that $2.25 billion, we have a further $2.25 billion in future pipeline. These are projects that we've acquired, have planning approval. Again, there's a significant geographic spread in relation to those projects. And they're in core markets, and we have core target tenants from relation to those. Over the next 18 months to 2 years, we'll work through in obtaining planning approvals, [indiscernible] pre-leasing campaigns, tendering construction for that new wave of investment for our various funds. But importantly, beyond the $4.5 billion of committed/non-committed projects, we've also been able to work with our funds on a whole series of master plans or the balance of their [indiscernible] portfolio in office to say one of the opportunities to add value and potentially, those jobs will lead to further planning approvals in time as we see opportunities to increase the value of those assets and also provide very long-term solutions for our tenants. But in terms of where we see the market at the moment, together with Jones Lang LaSalle, our in-house research team have assessed what we think will be the key growth tenants in the next 5 years in Australia. And what's important to say here is that they really reflect the strategy we've been working on for some years now, with a strong focus on government, a strong focus on technology, a strong focus on the health care sector and a growing focus on higher education. And again, the data support to our strategic direction we took some years ago. And again, we think that will be where the growth will be in market over the coming years. As been discussed by both David and Carmel, one of Charter Hall's key competitive advantages is our focus on working with repeat tenant customers. Over 64% of our customers provide income from our top 20 tenants and what's most impressing is 2 key things here. One is that over 1/4 of our customers come from government, so a very strong high level of covenant. And importantly, our top 20 customers over 50% of those customers have either done repeat business or a new to fund in the last 3 years. So again, our focus on working with new customers, as you'll see this afternoon for many of our projects is a key part of our strategy. If we go on to the area of government, and again, this is a reflection of our top 15 customers in government. And importantly, it's not just in commonwealth government. We have a real spread across the country as well. We have strong relationship with state government tenants across all geographic markets. We have some also large councils, as an example, Brisbane City Council. And again, we work through other 50 agencies in commonwealth, and state government, and local government across the country. If we look at those top 15 customers, what really important is over the last 3 years. We've done repeat business with 12 of those 15 customers in either new to portfolio, new to Charter Hall or repeat tenant customers. The reason that we focus on this is because [ age ] from covenant. 4 years ago, we had a strategy to increase our proportion of market share in government. We understood their tenant documents, their leases, their design. We built a relationship with their key stakeholders. So we know we need to be very competitive there. But we have a strategy in terms of engagement, understanding what their needs were and believe me, we're delivering significantly in terms of that. We have now over 45% market share in commonwealth government as an example and into the new projects under construction at the moment. But Charter Hall will look to a lot more adjacent segments of the market and a lot more just in terms of what the product initiatives need to be. We believe the greatest change that has been coming over the last 2 to 3 years and also will be really important going forward is technology. Technology to make tenants workdays better and technology in terms of dealing with the pandemic. On the screen, we've identified a number of key focus areas. In terms of health and hygiene, that's providing easy access into a building, where we can use your smartphone now to get in the front door, get in the lift, getting to the end of trip, even use a photocopier without having to touch a button. And again, working with tenant customers, they see the need to provide great systems, great improvements in technology to encourage their staff back into the office. And we believe these features will be actually become a common part of what we do in add buildings going forward. A key keep focus on cybersecurity. And again, we're working with large tenants such as Safecom in South Australia, looking at AFP across the country, ensuring we have best-in-class cybersecurity in our buildings. At the core of all these initiatives, though, is making staff's life easier and providing productivity gains for them. Providing buildings at tenants wanting being that the staff will as a key attractor for coming and working for an organization and for staff retention. So we really think technology is a huge part of what we're doing going forward. One of the other things we're doing in relation to technology is that because of a long lead time for our projects, which can be from 3 to 5 years. We're now allocating an important part of our budget in relation to technology to invest to the back end of the job. So as an example with 555 Collins Street with Amazon, the largest technology company in the world. We're back ending almost 1/3 of our expenditure in technology to the last 12 months of the projects, so we can see what's the latest and greatest in terms of technology and we can be totally up to speed of what's happening there as well. Another area that Charter Hall has been working on for some time now is in relation to sustainability, and we look at this at a number of levels. We're working to create WELL accredited buildings. That's the rating by the rating agency in terms of how the building operates. And again, is a key attractor to tenants of what they want. We now have the largest portfolio of 6 star Green stars under construction in the country. And again, what that's providing for our tenants and our investors is a better environment, but also a better and improved operating budget as well. So again, we built up over time, working with key consultants ways of delivering high-quality projects for the right price out of that and being able to provide to our funds, and then providing that benefit through to our tenants and our investors as well. A part of that focus has also been on delivering carbon 0 projects, and we're very happy to have now recently 140 Lonsdale Street, AFP's new Victorian head office for AFP now will be delivered with carbon 0. And also our recently announced 60 King William Street. Again, will be delivered with a carbon neutral strategy as well. So again, they're making very progressive and demonstratable examples of how we can make a better world for our tenants, our customers, our communities as well as we target net 0 by 2030. One of the other significant things we see in market is the rise of precincts. Many of you may have seen some of these examples around the world such as Kings Cross in London and Hudson Yards in New York, very much where organizations have looked at a larger play beyond individual building and look at the public realm bringing together a series of buildings that can easily work together. The first of these examples is Wesley Place in Melbourne for Charter Hall. It's a total site of 1.1 hectares. Last year, we delivered the first stage, a 60,000 square meter premium grade building 130 Lonsdale Street, again, delivered with 100% tenancy occupation on completion. It has the fourth green space in Melbourne CBD. It's the largest collection in the gothic buildings, heritage buildings in Australia, has the oldest olive tree in Australia. And what that really provides is an amazing public realm of retail contemplation and opens space for our tenants. Beyond 130 Lonsdale Street, we're also now building 2 other stages. Firstly, 140 Lonsdale Street, the new home for AFP in Victoria. A $390 million building pre-leased to government for 30 years. And the last component is 150 Lonsdale Street, an existing 30-year-old building and it comes with its economic end of it services life. And we're doing a major upgrade to that building now in terms of the lobby, podium and services throughout the entire building. And we're very had -- proud to have all investors down to show this project. But again, I think at the end of '22, when it's all done, you really will see the benefit of precinct projects. And again, Charter Hall is investing in this around the country. Going out to more detail regarding 130 Lonsdale Street in Melbourne. It was a project the group acquired in 2015. It was our largest development of any sector the group has done in its history, with net value of almost $750 million. It achieved the best standards in terms of sustainability across many metrics of Green Star, NABERS Energy, NABERS Water recycling. It has the highest WALE rating of our portfolio and pleasingly, demonstrated our ability to go into a 60,000 meter premium grade building and have fully leased on time and on budget. One of the great things of working with that partner is also was to deliver this building during the pandemic and not to have it late. So that was a key achievement by the group and definitely showed that we could push into the operational lines in terms of project delivery for our funds. We'll now play a short video on the project. [Presentation]

And this project example is 60 King William Street in Adelaide. It's in a large strategic site in King William Street over 4,000 square meters and 50 meters from Rundle Mall. Services Australia were located in 4 locations across Adelaide CBD and they've lined up all of their leases. Charter Hall were able to go in market competitively secure the site and then competitively win Services Australia for a new 10 year lease for an area of almost 28,500 square meters. Construction has recently commenced on the project, and will be delivered into mid-2023. Also as a building it will have a component of retail. And again, will build off the characteristics of being close to Rundle Mall and the major pedestrians find on King William Street and James Place. We're probably really going to create value for our funds, acquire off-market and win during the market campaigns to deliver a key tenant in Services Australia. Services Australia has identified earlier by Carmel, our repeat tenant customer of Charter Hall. On completion, we will have over 55,000 square meters to Services Australia, which will see them as being a top 3 ranked customer in office for the business. The other sector that we see is having significant long-term benefits is higher education and expansion into life sciences. Life Sciences is an extension of higher education with a high focus on both research, pharmaceutical, medical and health. Over the last 5 years, Charter Hall have built relationships with a number of universities. And importantly, we now have experience in delivering a broad base of curriculum. 1 Parramatta Square, that we delivered at the end of 2016 for the 2017 calendar tertiary education year showed a demonstration to provide a law and business and humanities facility there in the middle of Parramatta. Since then, we've expanded our range of curriculum knowledge to now include engineering and architecture innovation for our 6 Hassall Street project at Parramatta. And finally, at iQ Westmead, it demonstrates our ability to go into research, labs and higher education as well. In sector now, we have over $1 billion invested in this. And what also done is build our relationships with tenants in universities to buy, sell and leasback. And again, a growing component of the market that we see an opportunity to provide opportunities for our funds. 6 Hassall Street will be the next project that demonstrates our best-in-class skills in higher education. It's building is almost 29,000 square meters, located close to rail and retail in Parramatta, a 50% precommit by the university. And again, this is an example of collaboration where it wasn't just Western Sydney University. This building will also be operated by the University of South Wales, who will have a joint engineering program with Western Sydney Uni. We're delivering a 6 star Green star building in Parramatta, which will be the high level of sustainability rating in that marketplace. And we're due to complete that building in third quarter of this calendar year. [Presentation]

Our next flagship project across Australia is 555 Collins Street in Melbourne. This is a project that we acquired the first stage in late 2015 with the acquisition of 55 King Street. We saw the benefit in this end of the CBD as being the growth corridor of Collins Street and then [ 3 ] if we're able to go in via the second stage at 555 Collins Street. Since that time, we have obtained a planning approval for a premium grade building of almost 85,000 square meters. We've now demolished the existing 555 Collins Street and started construction on the first stage of circa 52,000 square meters. And we're very proud last year to have pre-leased Amazon as a major anchor tenant there. And again, it represents a repeat business customer for Charter Hall in group. This will be a premium plus building in terms of its amenity, in services, its sustainability, and we'll be delivering that into mid-2023. And finally, as we discussed earlier, the role of precincts across Australia. Something years ago, Charter Hall acquired 3 major assets in Shelley Street, Sydney 1, 10 and 12 Shelley Street. As you can see from this slide, each of those assets is significantly below FSR potential. And we look at the joining Barangaroo project, as we recently delivered with FSRs of 1 to 18. We think there's significant upside in this proceed. So we're now working with our funds in the master planning phase to find those opportunities to increase the potential FSR, but also to reimagine the public realm and bring together these 3 buildings to the same standard as Barangaroo. Hopefully, this afternoon, you've seen the breadth of Charter Hall as we've developed over the last 3, 5 years. Our workbook has grown now 18x in that period from $250 million in 2015 to now in excess of $4.5 billion, with also significant embedded opportunities across the balance of that portfolio. We look forward now to taking your questions and answers from the floor.

Okay. Great. Thanks, Andrew. I think we'll open it up to our Q&A session. And then obviously, following the office Q&A, where we've allowed about 20 minutes. We'll start with Richard and Andrew on Industrial and logistics. So let's just go through some of the questions that have been sent in. And -- so the first one is what are the return hurdles for development? What are the returns of existing developments underway and pending projects? And -- so I'll just get on to that because there's another part of the question, which is accordingly to this person, who's asked a question on market perception is the -- if bond yields back up further cap rates might go up and development profits may diminish. So the person is asking the question, what are the sort of margins we look at? Look, there is no single answer to the margin question. We have, I think, been pretty good over a long period of time at determining what is an appropriate margin for the appropriate risk profile. So obviously, in office or industrial, if we got 100% pre-leased project, the sort of margin that you're going to want on an asset without any leasing risk is going to be lower than what we would expect on a -- for example, 333 George Street, when we started that project with no office pre commitments, but 30% of the income precommitted to great retail tenants like HSBC and NAB. We went into that in CPOF thinking that we felt a sort of high teens margin was appropriate. And then as it turned out, we ended up achieving near on a 40% profit margin for the fund. Now there was a fair bit of cap rate compression that helped that. But even without the cap rate compression, we still ended up achieving over 20%. The reality is as cap rates have compressed over the last 5 or 6 years. And particularly, land values have escalated pretty significantly, the sort of forecast margins, nothing like sort of 20%. However, what I would say is in projects where we are not looking at 100% pre-leased development, but we might be looking at something, for example, 50% pre-leased, which still be looking to achieve gross profit margin, being the profit over the cost of the project in the mid- to high-teens. And if a few things go well, we won't always utilize the pretty significant contingencies we put in our project budgets, and therefore, we may do a little bit better. But it's pretty important, particularly when you're managing large pools of capital in the wholesale world that we're pretty conservative about our feasibilities when we present them to the RE boards. So we'd prefer to be conservative and achieve or exceed forecast profit margins than shooting the lights out on or being too aggressive on our feasibilities before we present them to a fund board. There is another question, which was -- we'd be interested in how Charter Hall calculates and thinks about replacement cost? I might just hand to Andrew to start with because when Andrew and the development team are working with our transaction team on securing sites, it's a pretty big issue. Clearly, we need to be convinced that we're going to be able to buy land and secure approvals and then develop projects to achieve margins and that relevance of where the market is for replacement cost versus land value goes to the very heart of whether or not you're going to be able to secure tenants out of existing buildings. And then Carmel might like to give a few comments around how we look at replacement costs versus market value on our stabilized assets because every day, we're thinking about a buy, hold or sell decision for our whole portfolio, so -- in each of the partnerships and in each of the funds. So maybe to you, Andrew first?

Yes. Thanks, David. In terms of our cost base, we see going forward is a low escalation market in relation to construction costs. And so that means that around Australia, we benchmark all of our projects. We compare data across all our key capital stage. So in terms of construction costs and replacement costs, we're seeing average ranges there between 5,000 and 7,000 [indiscernible] . That's our key comparative tool. And depending on the standard of building, whether it be A grade or premium grade. Land value is a key component. And I think what we've seen over recent years is an increase in land value across our core markets of Sydney and Melbourne. Going forward, we see that, that land value will be under pressure. We don't see significant escalation happening there in the medium-term in relation to that. But overall, what we're seeing is replacement costs for delivery of new product is in many examples well below the existing asset value of sites. So we think the development can be very competitive in the marketplace. What we've seen over the last 20 to 30 years as we have had crisis in market, there has been a significant flight to quality by tenants. Effectively, they're getting a better quality outcome for a more affordable solution. So we think that's going to be a situation, we definitely see over the medium-term now. So replacement costs are a key variable. We don't see significant increases in costs over the medium term, but we do see that the land value is unlikely to escalate the weights on over the last 5-plus years.

Yes. And I think on the existing portfolio, we are also looking at what's the replacement cost versus the existing -- the stabilized assets. And obviously, at the moment, we're seeing strong valuations coming through replacement costs below. And from a development point of view, we're always looking at -- does that make sense to develop at this point in time. So it's still quite hard to get development to stack up based on where land values are. It also depends on the market you're in, and David might want to comment on that further. But when we're also looking at transactions in terms of acquiring assets, we're always looking at with that lens. So what is the replacement cost? How much is actually investment value, how much are we paying for the cash flow and looking at it from that lens to work out where the value and the risk sits as well.

Yes. And if you go around the country, it would be no surprise what the highest incentive markets are. Perth still got one of the most elevated vacancy factors in the country at the net effective market rents in office in Perth. You'd have to virtually say it will be a decade away before we see new office development. Now that's if the market's rational. Unfortunately, I've been through a few cycles, and they're not always rational and Perth saw new development per Woodside, which surprised everyone and probably that market didn't need that amount of new supply. So we're a bit careful and cautious around where we want to play. Just in case, we sort of get caught out with irrational decisions on creating new supply. So hopefully, that sort of wraps up that question.

And let me just one thing I'll add there. So that goes to -- if you look at our Sydney pipeline, we've got more, I suppose, when we look at the Melbourne pipeline and more underway with 555 Collins Street versus what we have in Sydney. It's much harder. I think David would agree in terms of Sydney to get things to stack up. And agree with David about Perth, but I think on balance, we could see some new supply come out in Perth, whether that makes sense or not. But probably will be the case.

Yes. And look, one of the things that we've done really well is to extract extra lettable area out of stabilized assets. We've recently lodged plans for extra floor space on our 201 Elizabeth Street building. We never paid anything for that land. So the fact that we can create another 8,000 or 10,000 square meters is extracting real value at a negligible land cost. We're doing that on some other major projects. And as Andrew said, something like the 12 Shelley Street building and what we've got planned down there. When you buy assets virtually at land value based on the floor space that you can get on that site. That is a pretty good long-term strategy because it's effectively a brownfield opportunity where we get, in that case, a 9-year lease. And we've got an opportunity to take your time to get a planning approval. Another good question is with acquisition yields getting tighter by the day, do you see a scenario where you significantly increase your development pipeline over the next few years given the development yields, higher than stabilized yields? Well, I think there's no doubt this presentation is all about highlighting to the market that we've been doing it for many years. We're increasing the size of our completions, increasing the size and scale of our committed developments. And as you can see from this presentation, both across office and industrial, we've been growing all of those 3 metrics, completions, committed development and uncommitted development. The other part of this question is, the pipeline is very office focused. Is there an opportunity to diversify into other asset classes and what are the differential yields? I actually don't think it's very office focused. I think we've got a pretty good balance between office and logistics development, both committed and uncommitted. The difference is that A grade or premium grade buildings are typically worth $500 million to $1 billion per project rather than $100 million, $150 million for large-scale logistics. So you just have more volume in terms of the quantum of projects in industrial and logistics. But we've got virtually -- by number of projects, 5x the number of projects in industrial that we do in office, that's just the value of those projects in dollars is about the same. When we look at development in other areas, we just got to be careful that the market is there for it. Those of you that have followed CQR for a long time will know that we've always done some expansion of existing assets. I see that as brownfields development rather than greenfields. As that market has slowed the need for extra floor space to be carried out in shopping centers, and we've only ever done a very small number of it anyway in our convenience-based shopping centers. The yields on cost, incremental costs have always been reasonably attractive. And then we've been doing pre-lease development in child care for some years, but we typically prefer to, in that case, for someone like CQE to be the fund through investor rather than taking the development risk. So to sort of wrap up I think to answer question more broadly, yes, I think if you look at our -- the deploy component of our strategic pillars has always been satisfied through either develop to core or acquisitions. I think the weighting will continue to grow in development. But I wouldn't dismiss our appetite and our capacity to keep growing our portfolio through acquisitions as well. But we will do a lot more, what I'd call sort of brownfields acquisitions and where we're getting income-producing land, get approvals, get pre-leases and then go ahead with projects.

David, we also look at our current office portfolio. Hidden in that is almost 20%, 25% of our pipeline to construction now is in the higher education and life sciences, precincts. So I think that, yes, it's grouped in office, but really it's a different sector that we're focusing on there as well, which gives us that diversification that responds to growing customer needs as well.

And I think just on the fund side, particularly on the core funds, we actually -- there is a slight handbrake anyway in terms of the development potential we can take on. Generally, we're sitting around that 10% within the core funds. We do have a hard limit of around 20%, which is typical of the market for wholesale. And so we are getting a lot of interest from investors looking to do build to core with us through either partnerships and so on. But there is that natural break in terms of how much we could be doing in the funds as well. But they do actually, as you saw from the chart today, they add quite a lot in terms of alpha outperformance against the benchmark. So we just need to make sure we keep replenishing that pipeline.

Okay. So we've got another question, but it looks like there's 25 questions in one paragraph, but I'll try to dissect them. The first part of the question is the outlook for development commencements. Look, I think I've answered that. We are going to continue to see growth in both completions and commencements. The other part of the question is, what is the office outlook -- outlook, sorry, for office precommits and what's happening in terms of incentives in these deals? Look, the volume of inquiry, both government and corporate inquiry, around the country is really quite strong. If you add up the volume of government RFPs at the moment that are in the market in each major capital city, I think there's something like 200-odd to 250,000 square meters of government pre-lease inquiry formally out there in the market. You could easily get to that amount in terms of major corporate inquiries. So I think there is demand to -- for the -- for us to be able to secure office precommits on a number of our projects. I'll leave the industrial part of the question to -- later on when we do Q&A. And the other part of the question is, what is the yield on cost at Charter Hall Targets? As I said before, there is no one answer for yield on cost. It depends on the risk profile. It depends on the market. We -- as I said earlier, we would like to be securing in the mid to high teens as a gross profit margin. So if you've got something that's going to have an end cap rate of 4.5% and you do the maths at a 20% margin, you're going to be trying to get a yield on cost close to 5.5%. Now that's the simple maths of it. But as I said earlier, depending on the risk profile and then the level of precommitment will fundamentally drive our appetite. What I would say, in all of our wholesale funds and partnerships where the vast majority of our development takes place, in office, that's a CPOF or a CHOT; in industrial, it's a CPIF for a CLP or a PIP, there is a fundamental demand from our investors to not just have passive stabilized portfolios. They want us curating those portfolios by doing develop to core and creating new. Importantly, as Andrew and Carmel have both said, new stock, we need to constantly curate our portfolio and avoid the risk that we think exists in many other competing portfolios with obsolescence catching up on portfolio. So the best way to do that is to churn through and curate all your own modern stock for any -- because it's really difficult, particularly in office, but even more difficult in industrial, trying to find opportunities just to buy the very best brand-new office projects, pre-leased to great tenants with 10-year WALEs. They just don't exist. So you've got to have the ability to develop your own. And many of the people that are out there chasing and driving cap rates down in industrial are learning the hard way that you've got to be able to develop to core and have your own developed capability. Otherwise, the only way to get hold of assets is just keep bidding them up.

And maybe just on the precommitment. So David mentioned government, and government is a major component of what we're seeing in the market at the moment. But that's been a story that's been around for some time. And I think with the post pandemic, we're seeing more and more of this thematic where people want to upgrade. Government is a good example of where they're probably moving out of B grade. They're consolidating from multiple locations. They've been in older leases. They're getting out and they're now looking at actually, can I go into a new building? So we've been the beneficiary of some of that and obviously down in Adelaide with 60 King William and so on. But you'll see more of that thematic. What happened with our street, 201 Elizabeth Street example is a great -- another kind of good example of that. So -- yes, go ahead.

Well, I think the other component of the question was, are we seeing any change in requirements? And probably the key thing we've noticed in the last 6 months as requirements have come back to market is that pre-pandemic core areas were 80% to 90% of the total size of the commitment and the flexible component was 10% to 20%. What we are starting to see now is 70% to 80% of our requirements are core, long-term, 10-year circa requirement and it's 20% to 30% is flexibility. So we're having to adapt our lease offering. Some of that noncore component may be shorter-term leases of 5 years with break clauses. And I think that's what we're going to see increasingly over the medium term is that flexibility isn't necessarily about a significant reduction, but providing a high level of flexibility in relation to expansion, contraction, harbor spaces and coworking spaces in building.

Another good question is, how the rents and incentives in the forward precommitment market compared to spot rental markets? Once again, it's a difficult comparison because when you look at spot rental markets, you're not talking brand-new buildings in the main. So you've got to do like-for-like comparisons. But it's sort of -- my best answer to that is a bit like the sort of incentives that you typically have to pay to renew a tenant are going to be lower than the tenant -- that the incentives that you have to pay to attract the tenant into space in a stabilized asset. So in that same vein, incentives for new product, you'd say, are sort of comparable to the incentives that you're going to have to pay to attract tenants into existing space. With 2 providers, quite often, because of the specification being required by an RFP, whether it's a government or a corporate RFP and for all the reasons Andrew just outlined and as Carmel alluded to, a lot of these inquiries, particularly government, are moving from 3 or 4 locations in a particular city, some of them politely would be called B-grade quality, many of them probably C-grade quality. And there's a need for those agencies to move into modern technology -- latest health and hygiene and modern premises. So it's you've got to do the like-for-like comparison because you can't compare a C-grade quality to a brand-new A-grade or premium-grade quality. But I really don't -- and sorry, the other provider, though, is, in some instances, quite often, the market rent is an economic rent. If someone wants a brand-new building, whether it's a corporate or whether it's a government, there's a certain economic rent, which is basically the yield on cost required to fund the land, construction incentives that determine the market rents. So quite often, in development, that the -- it's the economic rent that gets secured rather than some sort of concept of market rent. But it then ultimately filters through to each of those markets because it does become rental evidence.

I think probably another component we haven't talked about today is just density where pre-pandemic, we had densities of 1 person per 8 square meters and even some spaces as low as 1 per 5. What we've definitely found in the last 6 months is that density as another key part of tenant requirements is now sitting more towards that 1 is per 12. We know that from a social distancing point of view, special designs need to be up to 1 is per [ holding ]. So we're not seeing the same push on density as we saw pre-pandemic as well. That's going to drive also what tenant's requirements are. And we're going to have to reshape that need going into our future projects as well.

So another good question and I think I know what this means. But the question was, can you give us some sights -- insights into the size of your shadow pipeline in [ bins ]? I think what you mean by shadow pipeline is pipeline that's not shown as obviously committed or uncommitted. But still, we have visibility through to that pipeline for a whole range of different reasons. It's sort of -- there are a number of those instances. And I guess it's not just land. But as I said, with 201 Elizabeth Street, it's existing stabilized assets where we can create more floor space potential -- potentially becomes part of a -- if you like, a shadow pipeline. And by the time we get it approved, it will be -- if we're going to start construction, it will go from uncommitted -- it will go from shadow to uncommitted and into committed once we start construction. Another good question and maybe this is one for you, Borge. What are your expectations of growth in construction costs over the next 3 years?

In terms of construction costs, our medium-term outlook is pretty flat. We are seeing an increase in terms of the facility to the health and hygiene and technology. But we think that will be covered off by net trade [ debt ] savings. It's a pretty competitive market out there to go on and [ become rigged ]. We're not suggesting there's going to be de-escalation, but we think it's a very stable across market in the medium term from a construction perspective.

Okay. Another good question is, if you compare 2019 to '21, which I presume is another way of saying pre-COVID, post-COVID, how is the pre-leasing strategy change for your major markets in terms of rents, incentives, lease lengths and tenant requirements? Yes. Frankly, there's no change. We're still looking -- we're focused on the long WALE thematic. We're focused on high-quality tenant covenants, government, high-quality, blue-chip corporates. And at the end of the day, the -- I learned a long time ago, landlords and developers don't set market rents. What sets market rents is the competition between tenants and what they're prepared to pay. So we've always been pretty good at meeting the market. We know what we're doing. I think as I said earlier, it's much better to have conservative buffers in your feasibility so that you can meet the market rather than starting with a feasibility that has got overly ambitious expectations on both face rents and effective rents.

I'll just jump in there. So a good example of that would be 555 Collins Street where we took a view to move on 555 Collins Street with the Amazon precommitment, and that was sort of sitting around that 30%. But we have confidence in terms of that product, confidence in terms of Amazon as a tenant, their ability to potentially expand over time, but also attract the right type of tenants into that location. So taking to account that and also where we saw the commerce and the buffers that were sort of built in there, that made sense for CPOF.

There's a question about 167 Macquarie Street. Is this a development opportunity or are you in the market? Now we went through a refurbishment process. We've secured new tenants at above expectation face and effective rents. And yes, that will continue to be a stabilized asset for us.

Just on that one. That's a great example of where we actually are seeing a lot of activity in under 1,000 square meter tenants. So we signed 4 heads of agreement in the last 3 months in that building and also had tenants basically trying to compete for the same space. So it's going very well since we reserved it.

Yes. This is a topical question because I think people have been thinking about this for a year since COVID. Do you think the office market is potentially facing some longer-term challenges? If yes, how would you navigate around this? Look, I've been very public in my view that I don't think what we're seeing in the work-from-home phenomena is structural. I think it's cyclical. Based on the immediate reaction to the health crisis, more and more large corporates and governments are encouraging their people to get back and work in the office. Yes, I think flex will continue. We had flex prior to COVID. But I can tell you, like Charter Hall is a good example. I've got to take another floor here at 1 Martin Place because I just can't get all my people back into an environment where we're no longer going to do activity-based working or agile working. We'll still have open plan. We'll still have precincts or neighborhoods where office might sit together and transactions will sit together, et cetera. But the days of trying to have 65% or 70% of your FTE with seats and get away with it with people moving 2 or 3 times a day, they're gone. I just don't see anyone and I don't hear anyone realistically thinking that's going to happen now. That means the workspace ratio is going to rise, and it's going to rise by 20% to 30% depending on who you are. So I think you've got 2 offsetting impacts that ultimately will see us with -- particularly once we have an effective vaccine rollout globally, I think we will look back and say, well, these were cyclical issues driven by COVID rather than any sort of structural change in space demand for office.

And maybe I'd just add to that. I agree with what David has just said. I think we are seeing more CEOs in Australia, also from surveys we're seeing around the world, I think KPMG did a survey not long ago and released at 500 CEOs around the world where they were asked back in August last year, were they going to reduce space over 3 years, and 60% said yes. So then resurveyed them in the last sort of few weeks, and it's only 17% actually said they're going to reduce space. So there is a change, and we're hearing that from our tenants as well. Despite that, there are some people who are doing hybrid working, and that may be the case. But we would still think there'd be offsetting factors, as David has said. So we're pretty cautiously optimistic. We're feeling a lot better than we were I think back in August last year, like the rest of the market. And signs are positive from tenants. But it's slower in terms of Melbourne, people coming back. But it was good to see the government come out and basically instructs people to be in the office at least 3 days a week. So I think some of those markets, which have been under lockdown for some time, are more the issue, but they will get back to where they are. But we don't think it's going to be the significant structural change that was, I suppose, discussed last year.

And I think Victoria is beginning because they actually lifted the capacity limits. So no longer can you use the health restrictions as an excuse for not having -- should you want all of your people in the office. So that and the directions that we're seeing from all levels of government I think is going to be helpful in seeing some better corporate leadership. The other thing I would say is anecdotally -- and we've got 1,300, 1,400 tenants. So we talk to a lot of tenant customers. Every week, there's evidence of more and more companies wanting to take control over their whole strategy with their people rather than continuing to survey the people and ask them what they want to do. Anecdotally, I'm hearing all the time, people are -- their own staff are telling them, we want the leaders to tell us what we want to do rather than get surveys asking us what we want to do. And I think you've got a whole generation in the postgraduate year, in their 20s and even into the early 30s, who actually want the mentoring and the leadership that comes with face-to-face collaboration. So I think it is going to be quite an interesting change in the whole rhetoric over the next 12 months, as I said, as we see effective vaccine rollouts globally. With that, I think we're going to wrap up now and thank Carmel and Andrew for excellent presentations on office.

And we'll just do a quick shuffle and introduce Richard Stacker, our Industrial CEO; and Andrew Simons, our Head of Industrial Development, who will run through and give a presentation on what is globally the hottest sector in real estate, industrial and logistics. So -- and then at the end of Andy's presentation, we'll do the same sort of 20-minute Q&A with myself and Richard and Andrew. So I'll hand over to Richard Stacker.

When you look at this picture and you see Australia Post, you may think of facilities like this sorting letters to be delivered. If you're a [ Shetty ] or a supply chain expert, you think of parcels, parcel delivery, online shopping and how critical Australia Post is in the supply chain solution for omnichannel and pure e-commerce businesses. At December, Aussie Post parcel and service revenue was up 26% from the prior year largely due to the strongest parcel volumes in the organization's history, which continued to be delivered to communities across the country during COVID-19 restrictions. The parcels business is now 80% of the business, up from 70% 5 years ago and continues to accelerate. David touched on the acceleration of online retail following COVID-19. Industrial and logistics real estate owners are a beneficiary of this, including Charter Hall and the funds it manages, particularly those with a development mandate. The scale, capability and national footprint of Charter Hall's industrial and logistics business is a competitive advantage. A national approach to the location of the portfolio on the ground team in each state and a serious development management capability ensures we are the partner of choice with local and national tenant customers. Growth is not possible without investor support and capital. And that does not come without performance. Our industrial funds have delivered an average of 12.3% since inception with our develop to core focus delivering alpha for the funds and outperformance against benchmarks and peers. If you couple all these elements with peaking the structural trends early, a team customer-focused culture and a cross-sector offering, it is no fluke that Charter Hall is ever so close to being the largest pure-play industrial logistics manager in Australia. Even with the difficulties of operating through COVID, many businesses may need industrial and logistics facilities have managed to excel during this time. And this success and their willingness to pivot their supply chain and distribution is reflected in the increased demand for new space at record levels in 2020. The chart on the left clearly shows since 2015 the above-average annual tenant take up a space of 2.5 million square meters. The right chart shows industrial and logistics supply averaging close to 1.5 million square meters over the same period, approximately 30% below tenant demand. On the ground, our teams in each state have experienced strong tenant demand, so much so, vacancy is less than 1% across the entire portfolio. Melbourne and Sydney inquiry has been particularly strong, and Charter Hall significant existing portfolio and land bank has seen us able to accommodate this tenant need with a significant amount of leasing and pre-lease commitment in 2020 and Q1 2021. 2021 has also seen a strong start in Brisbane as well as Adelaide and Perth where strong demand in existing assets and tenant market breeds the development of new facilities exist. The team is currently finalizing a land strategy, which will also include the East Coast, but also the opportunities that we see in Adelaide and Perth with tenant customers. You've heard a lot from David on Charter Hall's cross-sector focus, but how have we leveraged this to grow our industrial and logistics funds under management? The industrial and logistics business has taken a strategic approach to identifying key users of space in this sector. We reviewed the top 2,000 businesses operating in Australia, and we've broken these down to industry categories and identified those businesses operating in them that are resilient and growing. We are focused on the top businesses in these industries who Charter Hall has a relationship across other sectors and also those businesses we don't have as a group, and industrial and logistics customers have been identified as targets within those. For target businesses that are tenants and retail or office, but not in industrial logistics, we've leveraged those relationships. In 2020, this has included businesses like ALDI, a retail tenant where we secured $1 billion of ALDI DCs in a sale and leaseback transaction. Also, we have leveraged some of the office sector's largest tenant customers, such as Amazon. We have provided 2 industrial logistics facilities to house Amazon Flex, Amazon's last-mile spokes. The chart on the left shows Charter Hall's industrial and logistics top 20 customers. Over the last year, we've expanded our industrial and logistics footprint with 17 of these customers, showing just how our national scale, development capability and true partnership approach with tenant customers has resulted in industrial and logistics business growing $2 billion or 20% in 2020. This includes close to $700 million of development completions and 55 leasing deals totaling 770,000 square meters, providing long-term and shorter-term occupied space for some of the tenant customers in our existing portfolio. Some examples of that growth and resilience are the supermarket chains that continue to grow and evolve their businesses. On the supply, we've shown the assets we have leased and developed to consumer staples, government and retail businesses in industrial and logistics and across all other sectors in Charter Hall. The circles that have dotted black lines outline those assets we have partnered with our tenant customers to develop new facilities for. This is often not just been in one state, but also other states where we've used our national footprint to expand those relationships. Coles and Woolworths have pivoted their supply chain model significantly in the face of increasing competition, labor costs and changing consumer behavior, including the growth in online shopping. We're partnering with all the major supermarket retailers with this growth and transition. Andrew Simons will discuss this further during his presentation. I mentioned Australia Post at the start of my presentation. Charter Hall answered the urgent call from Australia Post to provide additional space in all states during COVID and provided short-term space in 3 states that has now been extended on 2- to 5-year terms with record parcel volumes being maintained by Australia Post. You'll keep hearing about cross-sector wins, our culture of partnering with customers. However, it won't just be from Charter Hall. More importantly, you'll hear it from our tenant customers. This partnering with tenant extends to our investors. They provided the capital to allow Charter Hall to build the largest pure-play industrial logistics pool fund, CPIF; and a large partnership with Telstra Super and VFMC core logistics partnerships, CLP. The 2 graphs show the journey of the 2 funds from inception. Yes, the funds have provided investors with a significant return on contributed equity. But what has been a real contributor to this outperformance, growth in the fund scale, quality and relatively young age of the portfolio has been the assets in the estates developed by Charter Hall on behalf of the 2 funds. The green, brown and blue circles reflect the assets developed, precommitted and uncommitted land banks in the funds. The growing importance of development in meeting customer requirements and deploying investor capital is shown on the next slide. The chart shows that funds under management created from our funds develop to core strategy has grown by a compound annual growth rate of 24% over the last 5 years, growing quicker than the growth in stabilized assets acquired. The business now has developed close to $4 billion in development assets since CPF's inception in 2006 with a committed and uncommitted future pipeline of $2 billion. This pipeline with a stabilized asset should grow at similar rates over the medium term. I'll now hand over to Andrew Simons, who is strongly leading the development team and its substantial growth and success on behalf of the funds.

Good afternoon. My name is Andrew Simons, and I'm the Head of Industrial Development at Charter Hall. My discussion will cover 3 parts: firstly, our industrial development pipeline; secondly, the 3 case studies of development projects we have and are delivering; this will then lead into a third section, which is a discussion around grocery retailing in terms of what we are seeing in new industrial developments and why Charter Hall is and will continue to be the dominant landlord in this sector. Our focus is a develop to core strategy, securing strategic sites in major markets, pre-leasing to high-quality covenants on long leases and creating development margins to enhance fund returns. In calendar year 2020, we delivered 15 buildings nationally with an on-completion value of just under $700 million. In calendar year 2021, we are on track to achieve a 30% growth in our committed developments and will deliver 17 buildings worth $900 million on completion. Whilst we have a national focus, our workbook is heavily weighted to Melbourne and Sydney with 15 of the 17 buildings to be delivered in these 2 markets. There are a number of large projects that span multiple years, including the 2 Coles projects that are under construction in Sydney and Melbourne that will be delivered in 2022 and have a combined value of $370 million on completion. Our total committed development book is $1.1 billion with 370,000 square meters of space. The total pipeline of committed and uncommitted projects is $2.3 billion with just under 1 million square meters of space. As Richard and David have indicated, it's our deep tenant customer relationships with our leading retailers and industrial and logistics users that have helped secure this pipeline and allow us to grow in the way we have. In terms of ESG, solar is obviously the largest opportunity for industrial buildings. We have partnered with our major clients to commit and deliver over 11,000 kilowatts of solar over the 4 years to 2023. As a comparison, this is equivalent to powering 2,000 homes per annum. We see this as an area of growing importance for both tenant and investor customers. Modern automated logistics can use up to 5x the power of more traditional logistics facilities. We have significantly grown our expertise in solar and continue to look for opportunities to enhance our existing portfolio and future developments through the addition of solar. Not only does this help us meet Charter Hall's commitment to net zero by 2030, but it makes good business sense and helps our tenant customers to reduce their operating costs. Over the last 8 years, Charter Hall has committed -- sorry, Charter Hall has sustained continuous improvement to our GRESB rating. And in 2020, the development projects in our largest industrial fund, CPIF, achieved the highest rating of all GRESB global participants. Charter Hall is committed to delivering 5-star Green Star on all our new development projects and is targeting 6-star projects in partnership with our committed tenant customers. I'd now like to look at several industrial development case studies. The estate is 17 kilometers from Port Melbourne. And you can see the Melbourne CBD in the background is only 23 kilometers away with Melbourne Airport also some 23 kilometers to the north of the estate. This short video provides an aerial representation of the significant scale of the project. This is a 60-hectare greenfield infill site that was purchased in 2018. The estate has a development pipeline of 180,000 square meters and has dominated Western Melbourne's pre-lease market over the last 3 years due to its prime infill location, our ability to efficiently accommodate large requirements and our strong multisector relationships. The site is well serviced by Melbourne's orbital network with multiple access points to the major arterial roads. The site is now 85% committed to Toll, Bridgestone, Coles, Uniqlo, Encore Tissues and Ingham's. Toll is 43,000 square meters and is complete. Bridgestone will comprise 2 buildings of 24,000 square meters and will be completed by mid-April 2021. Uniqlo is 46,000 square meters and will also be completed in April 2021. Encore Tissues is 15,000 square meters and will be completed in July 2021. Ingham's 26,000 square meter temperature control facility will be completed by mid-2022. Finally, Coles, 28,000 square meter Ocado facility will be completed by mid 2022. Our Midwest acquisition Board approval had a 6-year pre-lease and delivery program; and on completion, estate value of $330 million. The project will now be delivered 2 years ahead of program and with an on-completion value of $550 million being a 66% increase. This is primarily due to the quality of the covenants we have secured, the 14-year estate WALE that has been achieved, the accelerated program and a strengthening market. 95% of the income secured to date is either global or ASX-listed covenants. Of note is that of the 11,000 kilowatts of solar we're delivering nationally, 3,800 kilowatts will be delivered on this estate alone. The success of the development has also come down to the confidence that our tenant customers have in the industrial development team's ability to deliver these often complicated projects. The second case study is our TradeCoast estate in Brisbane. The 11.5 hectare estate is located 10 kilometers from the Brisbane CBD, 7 kilometers from the airport, 17 kilometers from the port and is a short distance to the on and off ramps of the Gateway Motorway. We acquired and consolidated 3 separate parcels to create this estate. The existing Toll NQX building was initially refurbished and extended, securing A.P. Eagers and Sandvik as tenants. Surface land was then incorporated into 2 adjoining sites to create the opportunity for 3 new buildings that we delivered for Amazon, DHL, Australia Post and Caroma. The 3 buildings were committed and delivered within 2 years. The tenants are all multistate repeat tenant customers with 4 of them also being cross-sector customers. TradeCoast Industrial Park is recognized as one of Brisbane's premium estates. Similar to Midwest Estate, the success of the project came down to Charter Hall using our in-house development capability to identify strategic infill location, then secure the opportunity through a process of site consolidation. It was then the depth of our multisector tenant customer relationships that delivered such a high-quality tenant estate. The result is we are able to deliver Charter Hall fund investors one of Brisbane's premium estates. The next section of the presentation is on Charter Hall's focus on consumer staples or grocery -- or the grocery sector. Whilst Charter Hall has 36% ownership in logistics, automotive, retail, building and hardware sectors, our dominant tenant customers are consumer staples. Our 52% weighting to the grocery sector has grown by 8% over the last 3 years. And of the $1.2 billion of development completions over the last 3 years, 44% were grocery tenant customers. Of the $1.1 billion of committed development pipeline, 65% is for grocery customers. We have targeted this sector given the resilient nature of the tenants, the size of the grocery market and the ongoing supply chain improvements these tenant customers are undertaking. We continue to partner with the leading players in this sector and take advantage of our cross-sector expertise and knowledge to grow alongside them. COVID-19 accelerated underlying structural trends. Looking in more detail at some of the structural trends that are driving this sector, the chart to the top right shows Charter Hall's dominance in this sector. With 49% ownership at the Australian landlords grocery real estate, our largest competitor is at 9%. The grocery leaders, Coles and Woolworths, at the forefront of automation as they strive to improve efficiency and reduce costs in their supply chain from warehouses to their stores. The next stage of this automation of online growth is the automation of ongoing grocery with Woolworth's and Coles accounting for 70% of the market. COVID saw online grocery demand escalate to levels not expected for 5 to 6 years. The chart on the left is now forecasting that online grocery in Australia will be $10 billion per annum by 2026. Now that customers have tried online grocery, the challenge for Coles and Woolworths is how to provide an accurate, high-quality, convenient product that will actually make money for the retailer. This is where automation becomes critical. The third case study is our 2 estates at Wetherill Park. Charter Hall is currently delivering 2 facilities in Sydney's Wetherill Park for Coles and the Woolworths-backed Marley Spoon. Marley Spoon's first automated facility will be completed this month. The project was committed prior to COVID, and it's critical for Marley Spoon to capitalize on the 70% growth in the last 12 months. Our pre-existing relationship with Woolworths was critical in securing and delivering this facility as Woolworths provided Marley Spoon with the property support in this development project. Similarly, Charter Hall is building Coles' first large-scale auto fulfillment centers in Sydney at Wetherill Park and in Melbourne within our Midwest estate. These projects are examples of Charter Hall partnering with our tenant customers to provide the expertise to deliver high-spec automated food logistics warehousing. Looking at online grocery and automation in a bit more detail. Coles and Woolworths have adopted different strategies to deliver their online grocery models. Coles has partnered with U.K.-based Ocado to deliver a hub-and-spoke model with Ocado having a proven success model of over a decade in the U.K. and are now rolling this out -- this automation out around the world. The model comprises large automated fulfillment centers that use dalek-looking robots to pick and pack customers' online orders. And yes, there will be an app on your phone. If the hub is within, say, 1 hour of the home, it will be -- it will go direct by vans. For longer times, there will be a number of strategically located spokes that will be delivered to you by trucks, and then these locations will have their own vans to deliver to the final destination. The benefits include that the automation will deliver very accurate orders with high-quality fresh produce based on what we've seen in the U.K. And the orders will be delivered the same day to customers based on times convenient to them. The efficiency of the automation and supply chain is forecast to deliver significantly greater margins for Coles online grocery business. Woolworths has adopted a different delivery system. It's a micro fulfillment center model that is ideally located inside or attached to strategically located existing stores, preferably adjoining the store's fresh products. It's a partnership with U.S.-based Takeoff Technologies using Knapp automation, which is an Austrian-based company. The automation will deliver 10,000 of its most in-demand items of the approximate 25,000 products that a typical store holds. The balance of the customer's order will still be picked manually from the store. Woolworths is targeting 30 minutes from order to being ready to pick up or dispatch by vans. Woolworths has built the first one in Melbourne and one is planned for Auckland this year. Woolworths plans a combination of large-scale fulfillment centers, often referred to as dark stores, and the Takeoff localized approach, leveraging off their existing store network. Charter Hall is well positioned with our portfolio of more than 30 Woolworths stores to provide part of this solution. Importantly, for investors in Charter Hall's industrial and logistics funds, we are well placed to work with Coles and Woolworths as they look to further improve their supply chain logistics operations. In concluding, there are different systems with the different benefits and constraints. However, in our view, there will be such significant growth over the next decade in our -- in the online grocery sector that there will be a place for both strategies to be successful. From Charter Hall's perspective, we will continue to partner with our tenant customers to grow with them in this sector. And as the final chart shows, we are and will continue to be the dominant landlord in the foods and logistics sector. Thank you. And I will now open to questions.

Great. Thanks, Andy, and thanks, Richard. So as we did with the office, we'll go through the questions and some of them -- we'll give you answers for some of them. Going to be a little more difficult, but -- because of the data available in industrial versus office, for example. But anyway, let's keep going. One of the first questions is, can you give us a sense of industrial incentives levels and change versus prior? Look, I'm not going to quote a particular percentage because it's very different by market. And it's -- and in the industrial pre-lease market, quite often, the rents are set at an economic rent that is ultimately what's needed to justify the cost of construction and on top of the cost of land plus a reasonable margin. What I would say, as a general rule, industrial incentives are less than half of what office incentives are. And in many markets, there are no incentives at all, as I just said, particularly on in industrial pre-leasing. Another question would be -- well, it's more of a statement. It says, industrial development would depend, to a large extent, on land ownership. Can you talk about available land across the platform? And relatedly, what margins would you expect on industrial development if you're acquiring industrial land at today's prices? I'll hand over to Andy. But just as a general rule, the availability of land in industrial has diminished and diminished very quickly in major markets. Sydney has been tight for some time. Ironically, with the Mamre Road Precinct and the sheer volume of land is now zoned for future industrial, the supply outlook in Sydney is much greater than the supply outlook in Melbourne. Melbourne's also in terms of absorption have been a much more -- a much stronger absorption market. But you've virtually got land values at sort of double to triple the level of land in Melbourne depending on which precinct. And when we sort of look at margins, as I said earlier when I was asked the margins in office, in industrial, virtually all of our projects are 100% pre-leased. So -- whereas I'm expecting mid to high teens sort of gross development margins in office, I'm pretty comfortable with sort of 10% margins in Industrial where the leasing risk is removed, and it's really a delivery risk. And as Andy alluded to, we don't start anything without a fixed price contracts with reputable contractors. So a lot of the risk in industrial, to be honest, is getting the -- from a project point of view, is getting the planning and then getting the estimates of civils right before you get out of the ground, which, frankly, is also a big risk in office is getting these buildings out of the ground. But I might just hand over to Andy just to talk about more broadly our land strategy and how we've been able to put our foot on land in key markets, develop and keep replenishing with new sites.

Okay. Thanks, David. Look, Melbourne is where we've got our largest landholdings. There's 3 large estates there. The first one, Drystone, we're probably 90% the way through. Our Midwest Estate, as I said in my presentation, has been very successful, and we're 2 years ahead of our program on that, and we're sort of running towards 80% of that. And we've got another, a 30-hectare estate, which we're working our way through at the moment. So they're probably the 3 biggest estates we have in Melbourne. Sydney, we've managed to replenish there recently. And we've got 2 new land banks we've secured since late last year that we're working our way through with another sort of 4 or 5 projects that we're delivering at the moment. So that's our second largest market. And then we go to Brisbane, which is a smaller market, but we've certainly got some 3 estates there. We're still working our way through. And in terms, we're also seeing some opportunities in South Australia. And Western Australia is starting to open up as well. So we're starting to look at that national focus as well. So that's probably where our focus is nationally in industrial land.

Yes. And just to add, the Adelaide story, like Andy's team just finished a great new project for Metcash who've pre-leased it on a 15-year lease. And that's created a very attractive new investment product for CPIF. So it's pretty typical of what we've been able to do. And Richard, you might talk through the broader relationship with something like Metcash having extended that lease in Brisbane as well.

Yes. Thanks, David. If you look at what we've done with Metcash around the country, we've got through their DCs. And realistically, with them, yes, it's close to $42 million of rent we're receiving from them out of a total rent, which they pay of about $150 million, and a lot of that's to private. So that $42 million that we do collect from them would be the largest land -- institutional landowner anyway for them. It adds to -- we've got a relationship not just on the food DC side, but also in the highway side where the business is growing very strongly. And we've done a development, which Andy's team delivered about 2 years ago now, for Mitre 10. So it's a strong relationship. We just had a strategy session with them during the week. And we see, hopefully, some more opportunity coming from that relationship.

Okay. Another question. A few of your competitors have talked about multistory development and data center developments. Does Charter Hall have exposure to these? Yes, we do. In data centers, what we find is our tenant customers in that sector like to be quite secretive, so we don't talk about it much. And in terms of multilevel developments, we are progressing that opportunity. We've already done this in a couple of key prime infill locations with our major tenant customer, Bunnings, where Chatswood, Castle Hill, we've got DA approval for another multilevel Bunnings facility up at Frenchs Forest here in Sydney. And we're also due to complete another similar-sized store at Doncaster in Melbourne. And we recently acquired the Bunnings Mascot site down in Alexandria on the corner of Bourke Street and Gardeners Road. And that's very likely to be a 2-level or multilevel industrial facility which may have some mixed use characteristics. You're going to have to do that in these high land value precincts. And I think South Sydney is a good example of where you may see some parts of the lower Northshore industrial precincts are definitely going to see it. So yes, I do think -- and to be honest, it's actually driven by necessity because of the cost of land in those locations. And ultimately, there are some customers that just have to be in some of those prime locations, and they're going to need to pay the rent that is determined by the cost of land. Another question is, what's the site coverage ratio across your industrial assets? And what do you think it could get to? Is this a driver of future development opportunities? I think your question is really asking us, do we see the ability to increase that site cover ratio as a way of densifying our industrial landholdings? It's a really dangerous thing to do to keep thinking that you can max out site coverage ratios because it doesn't future-proof your assets. So it's very difficult to just give you a homogenous answer. One of the reasons why across our sort of $13 billion existing book, and then if I add the development pipeline, we would probably be sitting at more like a sort of 40% site coverage is a lot of our brownfields-type opportunities are leased to people that are basically using hardstand. And therefore, they don't have buildings built on major customers like pre car, Manheim. The Qube facility at Minto that we acquired last year is a good example. So that tends to drag down your overall site coverage, which is defined as just gross lettable area divided by our total site area. But we also are very careful not to overly densify our particular projects. And that's whether it's existing stabilized assets or the developments. And Andy, you might just want to talk through the fact that, particularly of our blue chip customers that we're doing a lot of new DCs for, it's more important for them to have the truck turning areas, the curtilage, et cetera, that -- and therefore, quite often, they are sort of 35% or 40% site coverage, not 50%.

Well, if you're looking at these 2 new facilities we're building for Coles, they've got 600 vans to park there on site. So in fact, whilst the facilities are pretty intensive, we tend to be pushing more towards sort of 35% site coverage than 50% site coverage to get all the vans on site they need. So it depends on the requirement. I think it's pretty bespoke. Some are -- I mean we typically are 50% site coverage is what we do on a base case model, but it all depends on the tenant specific requirements.

The next question is one of the great myths about Melbourne. So the question was, Melbourne tends to have a lot of supply of industrial land. Can you talk about expectations of rental growth? As I said earlier, in the last 7 or 8 years, the west of Melbourne has turned from being an ample supplier to a very tight supplier of new land. And as I said, if I compare that to Sydney in over the next 5 or 6 years, Sydney out of Western Sydney is going to have a reputation of having a lot of supply of new land relative to Melbourne. So we actually think we're going to see good rental growth in Melbourne. And as you all know, rental growth's really an outcome of that supply-demand dynamic. This is an interesting question. How does the development team see opportunities to convert retail shopping centers into logistics facilities? Does it make economic sense? And how difficult is planning approval? I might just start there given that we're virtually the biggest owner of Bunnings assets in the country at about $3 billion and, therefore, have a big focus on the potential obsolescence of older style, bulky retail that may -- in particular occasions, may be more suitable for logistics. The big issue is not necessarily planning. It's really whether or not the land value that you have to pay does justify the cost of demolishing the buildings, existing buildings and rebuilding sheds. It's really that simple. So very few occasions have we seen it stack up. I think there may be some more opportunities. And Bunnings Mascot is a good example of recycling a 22-year-old Bunnings building into what will be sort of probably multilevel industrial. But yes, I wouldn't focus too much on planning approvals. It's more around just the economics of it all.

And I'd add, David, that I think a lot of the retailers are looking at almost those retail centers as an opportunity for last-mile click and collect. So in the sense of turning to logistics, it partly is in that way. But I think in terms of turning it into a warehouse, I don't think we've seen a lot of that yet.

And as I said in my presentation with the Takeoff facility that Woolworths is proposing, that will entail actually putting that automation to the back of their stores or bolting on to the site. So you are going to see a little bit of that blending of industrial uses into existing retail facilities to allow those operators to do online retail.

So this is a good question. I won't call out who it is, but it's a pretty good question. How would you evaluate the long-term likelihood of renewal of a high-performing grocery store, i.e., CQR, versus the automated grocery warehouse? Well, my best answer is that the probability of renewal will be very high in either of those scenarios if Charter Hall own the asset. So from a CQR point of view, we do believe that high-performing supermarket, grocery-anchored shopping centers will continue to coexist in an omnichannel strategy that the major supermarket operators will undoubtedly continue to operate with. A lot of online sales are still being picked from store, whether it's click or collect or actually online delivery from the store. And I think that the sort of automated grocery warehouse, using the words that you've used here, will coexist with a typical supermarket-based centers. One of the great competitive advantages we've got is that when I look at our industrial competitors, no one's got that insight into the shopping center retailers that we do because we virtually don't have any competitors in that space that have the footprint of grocery-anchored shopping centers that we do. So we think it's a pretty important element of staying close to our customers. But I think there's a future for both of them. And in terms of the -- I think what you're really saying is what's got the highest renewal probability, with the amount of money that these major retailers are spending in terms of their fit-outs on these major sheds, they're going to need to be there for 40 years just to amortize that cost. So I'm not too worried about renewal probabilities just like I'm not too worried about renewal probabilities on what some people call specialized or what we call sort of chilled and refrigerated cold storage. It's becoming very important. And I think COVID has fully accelerated the focus on the need for domestic production and distribution of food. And so I don't think that's going to change. Over my career, cold storage has typically had much lower vacancy rates than your general industrial market. In terms of portfolio growth, which of the acquisitions development strategies do you see is more viable going forward? Well, Richard, I might just -- in terms of Head of Industrial, how do you see the sort of blend of both in terms of the appetite from the funds and partnerships?

Yes. Look, most of the fund mandates we have are pure development. So acquisition is a big focus. If you look at the industrial business, close to 60-odd percent of the acquisitions that have been done over the last 12 months have been off market. So it's a big part of the book. The development strategy is a very important part of that. And we're finding it more important from the perspective of the tenants, too. Our scale and ability to move tenants around that flexibility we've got with the scale of the book plus the land banks we have will be very important to have both. So -- but as a mix, I'd say, still acquisition will be a significant part of the strategy.

One of the other questions is, can you talk about rental growth expectations across industrial markets? And what does that imply for asset values? Look, as I said before, industrial's typically tracked at CPI or CPI plus over many decades, except in periods where that supply-demand imbalance gets out of whack. Well, I think we're going to see pretty good growth coming out of Melbourne for the reason I outlined. I think there's a shortage of land and there's still very strong demand. And for people that are distributors of whether it's consumables or discretionary sort of retail products, it's still the biggest industrial market in the country. But I think Sydney will be okay. And I think some of these other markets might actually surprise everyone, including some of our people in terms of where rental growth in places like Perth, Adelaide and Brisbane may go. And you sort of look at our portfolio, we're virtually 100% occupied. So it sort of feels like growth will be pretty good, both face and effective rental growth. The other question was, similar to office, can you touch on replacement cost for industrial? Look, it's -- like office, plus or minus, probably 5% or 10%. And Andy can comment on this. Yes, your cost of construction is the same in every market. So what drives the differential in rent is land value. First time in my career, the land value as a percentage of the completed product value in Sydney is above 50%. And so if you're looking at site selling at $900 a meter, which we've just missed out on another one, looks like it's -- yes, another example of data center, owner operators paying above industrial value for land. But if you say $900 times 2 at a 50% site coverage, it's $1,800 a meter of lettable area is the cost of your land. And if it's costing you $800 a meter to build it, your land is a hell of a lot more than construction. Whereas if I go to Melbourne and I can buy land for $300 a meter in that $600 of lettable area, that's less than the cost of construction. So that gives you an idea of what are the drivers of economic rent and then, ultimately, market rents. So the -- Melbourne for a long time, when we bought that Drystone Estate 7 years ago, we bought that for $25 a meter unserviced, at servicing at probably over $80 or $90, that land would be worth $350. Yes. So land values have really jumped. And essentially what's happened with cap rate compression, most of the cap rate compression has gone through to the growth in land base.

Yes. The other thing I'd add to that is, certainly, part of our focus is not just on looking at land in Sydney's West or Melbourne's West. We're actually very focused on infill sites. Some of those sites where there are buildings are starting to get the end of their economic life and getting in there and demolishing those buildings and building a modern facility there. And that's certainly key to our strategy as well. You can't buy the size of land. But certainly, we're targeting sort of in a 5 to 10 hectares of infill where we can turn it pretty quickly and meet customer demand for that sort of product.

Okay. Well, I think that's right on 2 hours. So we're going to wrap up. Thank you to Richard and Andy. And thank you to our investors that dialed in today. Just like to, yes, thank the whole Charter Hall team, big effort putting this together not only the sectors and the development team, but Phil and his team. And as usual, feel free to reach out to Phil if you've got any follow-up questions. But from a Charter Hall Group perspective, hopefully, this is giving you a better appreciation of the depth and the scale of not only our capability, but our footprint in these key markets that when you add up sort of office and industrial funds under management in our business, you're talking about virtually 70% of our total portfolio. So it's a pretty important driver to have the ability to manufacture our own investment product in those 2 core sectors. Okay. Well, thanks very much for everyone's attention.