Link Real Estate Investment Trust (823) Earnings Call Transcript & Summary

Okay. Welcome. Good afternoon, everyone. Welcome to our Link 2024-2025 interim results briefing. So I'm Christy, the emcee of today, Director of Investor Relations. Today, we are very delighted to have our new chair, Mr. Duncan Owen, to be with us today. So it's really rare opportunity to have a chair to be with us in the results briefing. So thank you, Duncan. And we also have our management team here, Group CEO, George Hongchoy; CFO, Mr. Kok Siong Ng; and also our COO, Mr. Greg Chubb. So here is our agenda today. So first, we have Duncan to share the macro overview and also the outlook. And then George to share the interim results highlights and also share a bit on the outlook onour operating markets. And then followed by Greg, who will share more on the operational updates on our key markets, Hong Kong and overseas. And then K.S. will continue to follow on the operational updates on Mainland China and also on capital management. And then later on, George will be back to talk about the strategy update. And finally, we will have our Q&A session. So now without further delay, will have -- I will pass the floor to our new chair, Duncan.

Thank you, Christy. Good afternoon, everyone. It's a real pleasure to be here as the new Chair of Link. We remain, as I think everyone knows, a leading independent fully integrated real estate investor and manager with an increasingly strong track record. Our goal is to be the trusted partner in APAC for our unitholders and various other investors and stakeholders and to continue upon our track to build our track record that we've had now for almost 2 decades. Link, however, of course, is not an ordinary REIT because it is an investor and a manager as well as an operating platform. The opportunities to create new sources of growth lie in developing these 2 complementary business lines: increasing the quality and resilience of our earnings, through diversification of the Link REIT portfolio as well as expanding the investment management business. I'll let George elaborate about this more when he covers the strategy section. Moving to the macro overview and outlook. Sometimes this can be a slightly gloomy picture. But the global real estate market is encountering what I would call, crucial pivot points, driven by multiple macro economic transitions. We're all aware of these things. They include demographic changes, geopolitical changes affecting trade flows, climate change, sustainability and, of course, rapid technological advancements. These transformations affect the Hong Kong economy and the all effect in the real estate landscape throughout the APAC region. Though the outcomes of these shifts remain unknown. They signal heightened uncertainty and the necessity for all businesses to adapt in the face of these changes and transitions. We've yet to fully appreciate all the consequences of the unprecedented quantitative easing after the global financial crisis. And now it's rapid reversal over the last few years. This has posed challenges for individuals, companies and national budgets alike as interest rates rose, many face declining real incomes leading to reduced consumer and government spending, which we've all witnessed. Real estate, of course, is a non-homogeneous asset class. It is essentially -- it's essential to not only maintain the scale and liquidity of REIT -- of Link REIT, but also to ensure we're a compelling business model and have a compelling business strategy that demonstrates both the resilience as well as the future capacity for above-average risk-adjusted returns. Turning to the market outlook. The last slide from me. Really looking at the macroeconomic outlook, the keyword remains uncertainty. Although the Federal Reserve and other global central banks have started on their interest rate cuts, there remains the need for balancing inflation with economic growth, thus avoiding, of course, recession. As such, the pace and breadth of these rate cuts, we believe are expected to be gradual and will be uncertain. The presidential election in the U.S. is likely to add fervor to longer-term uncertainty as it will take time for the implications of the election result to play out for all of us. Furthermore, the structural changes from the Greater Bay integration has caused consumer behavior to change. Correspondingly, this has led to retailers to review and adapt their strategies and that impacts Link as it impacts other REITs in the region. However, there are some bright spots. These include the economic stimulus in Mainland China, the policy easing and the reversal of austerity. And meanwhile, in Hong Kong, the easing of interest rates are likely to benefit the real estate markets in general. There are also some early signs of stabilization in the investment market and rental growth for the very best-in-class assets that are competitive. I think the price dislocation has also resulted in a number of investors beginning to explore opportunities again because assets may now provide, from this point in the cycle, above average risk-adjusted returns. Thus, whilst the macroeconomic backdrop requires caution, opportunities will arise for active investors who have a differentiated operating platform such as Link. It's really there for us to take advantage of those opportunities. Thank you, everyone. I'll now pass to George to talk about the interim results and the highlights.

Thank you, Duncan. I'm pleased to present our financial performance, which we announced earlier today. Despite a challenging retail environment in the key operating markets, our commitment to operational excellence in capital, asset and portfolio management has yielded solid results. Revenue and NPI increased by 6.4% and 5.8% year-on-year, reaching HKD 7.1 billion and HKD 5.3 billion, respectively. This growth was mainly attributable to the new contribution from the recent acquisition of an additional 50% stake in Link Plaza Qibao, along with the improved performance across most of the operating markets. Accordingly, the total distribution -- distributable amount increased by 4.3% year-on-year, while DPU grew 3.7% to HKD 1.3489. As for NAV units, it fell by 4.6% year-on-year to HKD 66.8 due to a decrease in asset valuation, largely from cap rate expansion. Meanwhile, net of gearing stood at 20.6%. Throughout the reporting period, we made significant progress in optimizing the portfolio. Hong Kong saw a 2.2% increase in total revenue and a 2.4% year-on-year growth in NPI, driven by consistent performance in the retail sector. We are also pleased to report the improvement in Mainland China operations. With the increase in revenue and NPI by 39.2% and 37.6% year-on-year, largely due to the contribution from the additional 50% from Link Plaza Qibao. Taking out the acquisition, revenue and NPI growth would have been 6.5% and 4.9% year-on-year in Hong Kong dollars. Moreover, the benefits of our diversification strategy over the years, become more evident as the healthy operating metrics in both Singapore and Australia help counterbalance the challenges that we face in Hong Kong and Mainland China. On asset enhancement front, we have completed 2 projects in Hong Kong, achieving ROI of 17.2% and 19.9%. This accomplishment reinforce our commitment to maximize property value in core markets. In Mainland China, we executed an asset enhancement at Link CentralWalk yielding an ROI 43.8% and significantly improving the asset's overall performance. This outcome underscores our robust asset management capabilities in key markets. I would also like to highlight our robust financial position, and we have maintained a low net gearing of 20.6%, which provides that us with ample capacity for growth. Moreover, through proactive capital management, we're able to manage our overall all-in borrowing cost at a favorable level of 3.69%. In a nutshell, our focus on diversification, strong asset management capabilities, sound financial position, strategic cost management put us in an advantageous position to cope with the evolving market conditions. Looking at our operating markets. Hong Kong, the population has returned to 2018 levels -- the recent expansion of the Top Talent Pass Scheme is expected to provide additional growth to both population and also driving demand for consumer spending. The addition -- additionally, Hong Kong economy and property markets are supposed to benefit from interest rate cuts. This development is expected to stimulate investment activities and boost consumer spending alongside with potential easing of the Hong Kong dollar exchange rate, thereby bolstering the economy. Adding to this positive momentum, the central government in China launched an array of stimulus packages in September and October, which are expected to reinvigorate the economy. The recent Hong Kong policy address also propose a series of property market policies to enhance overall market stability. These measures aim to create a sustainable growth path for Hong Kong, ensuring long-term benefits for homeowners and investors alike. And this improvement in -- also in employment income through potential minimum wage adjustment is expected to boost consumer sentiment. In Mainland China, the PBoC lower both the deposit and loan rates. The measures help to inject liquidity into the market by boosting borrowing and investment activities and thereby sustaining economic growth. Furthermore, adjustments in housing policies, such as lowering mortgage rates, reducing down payment ratio for second home buyers and relaxing certain purchase restrictions aim to stabilize the property market and prolong long-term growth. With a low inflation environment, it is conducive to both keeping business and consumer cost in check. Although the full impact of these policy in China will take some time to manifest, early signs of improvement are visible in the third quarter '24 GDP data, where industrial output and retail sales have gained momentum. Looking at the current economic landscape of our other markets in Singapore and Australia, September 2024 total retail sales in Singapore was positive. F&B Services grew moderately at 1.6% year-on-year and the sustainable growth in new PMI orders driven, by a recovery in the electronic sectors, bodes well for the economy, which would have a positive effect on consumer spending. The labor market dynamics, including the influx of high skill and therefore high-income foreign workers, as well as low unemployment, are supportive of consumer sentiment as well. In Australia, the minutes of the Reserve Bank of Australia indicates that policy easing is not expected in the near term due to persistent inflation. Nonetheless, consumer sentiment improvement of 6.2% in October 2024, as indicated by the Westpac-MI Consumer Sentiment Index, largely fueled by reduced concern over potential rate hikes. Additionally, a stable unemployment rate reinforce the overall economic visibility in the region. Let me hand over to Greg to share with you the operational update.

Thanks, George, and good afternoon, and thanks for joining us. And I'll start by looking at the performance of the Hong Kong retail sector where revenue for our Hong Kong operations have increased by 2.2% year-on-year. Our portfolio occupancy rate has remained stable and robust at 97.8%, and this underscores the resilience and strength of our essential needs focused trade mix, even in the face of very challenging market conditions. Rental reversion for the segment experienced modest growth of 0.7% and the average unit rent edged up slightly to HKD 64.50 per square foot compared to HKD 64.40 in March 2024. And looking at the performance of retail sales here in Hong Kong. And during the reporting period, the ongoing effects of changing consumer habits and unfavorable currency trends continue to dampen the overall retail sales growth in Hong Kong. Lease portfolio tenant sales declined by 4.3% year-on-year, whilst the broader Hong Kong market show by 8.8% year-on-year. When we analyze by trade mix, F&B remained relatively resilient, experiencing a very modest decline of 0.7%. However, the supermarket, and particularly the food stuffs categories continue to underperform slightly to the Hong Kong market, while general retail declined by 6.6%. And given these developments, it's crucial that we continue to respond, and we remain open to optimizing the portfolio as and when opportunities arise. Looking at occupancy costs, where we observe an upward trend during the first half of this financial year, although they remain at a very sustainable level of 13.1%. And by trade mix, F&B and supermarket & foodstuff fall within the lower range of 13.1% and 12.1%, respectively, and occupancy costs for general retail stands at 14.4%. Now in response to the challenging market landscape, we've increased the leasing efforts to capture emerging market demand and improve the curation of our tenancy mix. In the first half, we signed over 300 new leases and this showcases our ongoing leasing efforts across the business. We introduced 18 new brands alongside 185 existing brands that have expanded alongside us. And this has been crucial in maintaining the broader market relevance across our portfolio. We've strategically been cross-selling brands between Hong Kong and Mainland China portfolios, and we've significantly boosted customer engagement. One notable success story is a Mainland Chinese brand by the name of Muchin, and they've debuted their first store in Hong Kong at our Choi Ming Center. Additionally, we've continued our leasing focus on capturing emerging demand and trends such as pickup service points and 24-hour fitness centers to attract more foot traffic and enhance our customer offerings. This period, the most demand has been seen in areas such as education, specialty restaurants and family entertainment. And as for our Hong Kong car park and related businesses, we've experienced a 1.4% year-on-year increase in revenue. We have observed parking ticket sales have declined, but this has been offset by increases in parking tariffs. We're focused on staying attuned to market trends and devising strategic plans to sustain the performance, including the rollout of our new car park management system that I'll touch on briefly now. So we've completed the digitization of our car park management system to enhance productivity. Within just 4 months, we've transformed over 56,000 car parking spaces across our 121 parking facilities. And this encompasses than 500 lanes. With the introduction of this cutting-edge AI technology and cloud-based systems, new features will also include convenient car park payment systems via multiple e-platforms, including our Link Up app and digitized customer services to enhance the customer experience more broadly. Now additional upgrades such as license plate recognition and improved vehicle traffic efficiency designed to offer our customers a smooth and convenient parking experience and driving footfall back through our shopping centers. Furthermore, we're exploring similar enhancements across various elements of our operations to uphold our commitment to operational excellence. Enhancing the underlying positioning of our assets is an integral part of our DNA here at Link. During the reporting period, we completed 2 further projects aimed at boosting asset performance and returns. The capital expenditure pipeline currently in planning or pending statutory approvals stands at over HKD 650 million. Asset enhancements recently completed or currently underway involve a combined capital expenditure of some HKD 167 million. Fu Shin and Sau Mau Ping were completed in the first half of the year, with capital expenditure of HKD 37 million and HKD 55 million, respectively, yielding very good returns of 17.2% and 19.9%, respectively. And I'll touch on the Sau Mau Ping project in a little more detail, where we've proactively engaged our asset enhancement skills, and we'll continue to capitalize on these opportunities to elevate the customer experience. And recently at Sau Mau Ping, we converted the third floor space and the children's playgrounds and this involved relocating the former Department of Social Welfare office space and transforming the roof garden into a really great children's play facility. Our strategic tenant remix there features a clinic, light refreshment options and F&B area with views over the new playground, thereby enriching the offerings to meet community needs and driving rental uplift. This has been carefully planned and all the arrangements are effectively there to attract more customer visits to the third floor, increasing footfall and overall engagement. The project, as I mentioned earlier, was at HKD 55 million as yield and a nearly 20% yield on costs. So in a bit more detail with regard to this playground that showcases our placemaking efforts really well. The previous year was very, very unappealing, and it's been transformed now into a vibrant destination through this placemaking initiative. And the revitalized space now boasts a rooftop area featuring a geometric wonder zoo, as we're calling it. And this is a captivating animal-themed park. It offers a variety of exciting amusement facilities alongside an educational zone where children can explore and learn more animals. We aim to replicate this successful approach in other suitable locations to ensure continued sustained growth and our continued focus on operational excellence. And beyond the physical enhancements of our assets, we're committed to investing in green initiatives and endeavoring to create new revenue streams from these efforts. We've recently entered into a build-operate-transfer or BOT service arrangement with CLP for a series of solar generation systems where CLP will cover the capital expenditure for building these systems, and we'll share in the feed-in tariff come according to a predetermined ratio. All electricity generated by these solar systems will be purchased by power companies at the current tariff rates. Additionally, we plan to expand our solar generation beyond what this current agreement covers, allowing us to sell the generated power at the full current tariff rates, further establishing new revenue streams. Now I'll move on to the international portfolio, where in Singapore, our assets at Jurong Point and Swing By Thompson Plaza are performing really well. This is underpinned by steady suburban demand with shopper traffic having recovered to pre-pandemic levels, solid occupancy rates now of 99.8% and very strong continued positive leasing reversions at 18.9%, has been seen across our Singapore portfolio. And taking a closer look at the trade categories which have driven the sales performance. This includes food and beverage, and beauty and wellness. In terms of tenant demand, Singapore has become a critical hub for overseas retailers and F&B operators, especially for Chinese brands aiming to capture the broader Asian markets. These present us with opportunities to introduce new tenants to our malls in Singapore but also here in Hong Kong. For our Australian properties, consistent performance has been steadfast. Continued improvement in tenant sales, higher footfall and firm occupancy is now at 99.1% have resulted in boosting the appeal of the malls to tenants and customers alike. Continued new openings of new and unique brands are contributing to this performance. The trend of increases in overall CBD activity in Sydney has been sustained in the last year, arising from higher tourist arrivals and the pickup of in back to office. In addition, the new Sydney Metro Rail and namely the Gadigal Train Station sits very close to our 3 properties in the Sydney CBD, and this has boosted connectivity, and it's only a short walking distance to our 3 properties, boosting their strategic locations. And finally, from me, for the international office portfolio, which encompasses our Australian assets as well as the Cabot in London. And overall, we've got a relatively long WALE that's been maintained at 4.7 years, and occupancy has been preserved at 90.2% as of September. Initiatives taken to improve occupancy rates include new speculative office fit-outs as well as a lease-up of a number of these speculative suites at our 347 Kent Street property in Sydney that were completed last financial year. These have been supported by the ongoing flight-to-quality trend that is evident throughout the region, whereby core precincts have seen positive net absorption. And by virtue of this, maintaining a high-quality portfolio enables us to capture tenant demand driven by this growth in white collar employment and the need for more collaborative workspaces. On a broader basis, the Sydney CBD has the added advantage of having a very low pipeline of new supply in '25 and '26 and is expected to heighten occupancy and demand for office space. That's it for me. I'll now pass on to K.S. Thanks, K.S.

Thank you, Greg. Good afternoon to all of you. Let's shift the focus to Mainland China portfolio. In first half '24-'25, despite ongoing consumption downgrades and a challenging economic landscape, fashion and accessories, F&B outlets and groceries targeting the mass market experienced strong leasing demand. Occupancy remained solid at 96.4%. However, portfolio enter reversion turned negative 3.2%. And primarily impacted by the Beijing Mall in Zhongguancun, which is currently undergoing major tenant remixing and repositioning. If we exclude Link Plaza Zhongguancun, rental reversion we have registered a growth of about 6.5%. The portfolio rental reversion is expected to level out at my end of this financial year. In response to the evolving retail landscape and to maximize asset value, we have started enhancing the malls in Beijing and Shanghai, Zhongguancun and Qibao, focusing on a portion of the basement area and the repositioning of specific floors, respectively. An estimated CapEx of RMB 25 million has been allocated to the 2 AEIs with a target completion late in 2024. Additionally, we have 2 large scale projects undergoing AEI with a combined CapEx of RMB 180 million slated for completion in mid 2025 at Tianhe and Tongzhou. We have been actively making efforts to pursue operational excellence and enhance overall performance. Recent renovation of basement area at Link CentralWalk showcase our capabilities in navigating challenges and transforming underutilized space into valuable assets. At Link CentralWalk, our active asset management team developed a strategic plan to negotiate with Carrefour, our anchor tenant, which began scaling back operations during COVID. Through ongoing discussions with tenant, we successfully downsized the space and ultimately terminated the lease with Carrefour, allowing us to reposition the basement. Our swift reaction to the shifting market conditions has resulted in increased rental income, introduction of more productive tenants and a more vibrant shopping environment. The renovation was completed and unveiled in July this year with a capital expenditure of RMB 24 million, yielding an ROI of almost 44%. A broader range of options is now being offered to shoppers by bringing in over 50 new tenants to the basement. In the past 3 months, the mall has experienced a significant increase of over 30% year-on-year footfall over 60% year-on-year tenant sales. The asset enhancement initiative in the basement of Link Plaza Qibao also exemplifies the commitment to operational excellence. Collaborating with Vanke, we transformed the space of a low-performing anchor tenant over a period of 2 years, which previously offered limited options for shoppers, into a vibrant area offering a diverse array of F&B options. This initiative not only elevated the shopping experience, but also attracted a broader customer base, driving footfall and customer satisfaction. The rental rates more than doubled following the renovation, resulting in ROI 106% on a CapEx of RMB 5.2 million. A total of 26 new tenants were introduced to this revamped retail space, bringing a diverse range of offerings that cater to various customer preferences, including grab-and-go, specialty restaurants and unique dining experiences. Turning to the logistics portfolio. We continue to face challenges in the market, particularly in the Yangtze River region. This year, the [ chasing ] market experienced a significant influx of supply. Hopefully, this will be absorbed in the near future. Despite these challenges, we observed a steady improvement in occupancy rates, primarily driven by strong leasing activity in the Greater Bay area. The occupancy rate grew to 98.2% in September 2024 from 96.2% in March 2024. Next, capital management. Our strong financial position is well supported by a healthy balance sheet, as shown by the key metrics here. Net gearing edged up marginally but maintained low at 20.6%, while the average borrowing costs remain competitive at 3.69% despite interest rates staying elevated. EBITDA interest coverage improved to 4.8x. Fixed debt ratio reduced moderately to 66.4% in view of the beginning of the easing rate cycle. This is expected to decrease progressively given the rate cut outlook. The disciplined approach to debt management with diversified sources of capital across debt instruments has helped us achieve a competitive average borrowing cost of 3.69%, as well as maintaining our robust credit ratings. Having repaid some debt during the period, the debt balance reduced to HKD 55.6 billion. As such, we only now have a balance of HKD 2.4 billion due for refinancing for the rest of FY 2025. The robust credit ratings achieved alongside the debt management has reinforced the ability for us to assess capital favorably and at very competitive financing costs. On valuation, portfolio value declined by 2.1% half-on-half. Among these sectors, the office segment experienced the most significant cap rate increases across all regions. Other cap rates for retail in Singapore and Australia remain unchanged. Other regions encountered a varying degrees of cap rate expansion. Additionally, logistics sector in Mainland China also saw an expansion in cap rates. Next, I'll pass the floor back to George to talk about the strategy update.

Thank you, K.S. Firstly, to begin with, plus have a look at an overview of the Link REIT portfolio. It is mostly weighted towards Hong Kong at 74%, followed by China, Mainland China. The international portfolio consisting of Australia, Singapore and the U.K. accounts for 11% of the portfolio value. Breaking down the portfolio by sector, retail accounts for about 70% of the portfolio value followed by car parks and related businesses at 20%, office and logistics are collectively at about 10%. So over time, seeking further diversification and growth under Link 3.0 would help us to strengthen the portfolio with a better balanced exposure across key APAC markets, enabling us to generate attractive risk-adjusted return to our unitholders. Further details will come in this next slide. The need to evolve our corporate strategy is driven by the increasingly uncertain and challenging market due to persistent long-term structural changes, which Duncan has highlighted earlier. Building on this, we aim to be a REIT plus investment case, to overcome the market challenges such that our returns are resilient against market cyclicality and are able to deliver above-average earnings growth. Broadly speaking, this is to be attained through building our capabilities and track record built over almost 2 decades. The way forward would be to do this through active management and further diversification of the Link REIT portfolio. These are vital to enhance resilience and ensure that the portfolio achieves a balanced exposure across key APAC markets. With this in mind, accretive investment opportunities are being considered across geographies and asset classes as we monitor regional repricing trends and investment fees. We see opportunities in Australia, Japan and Singapore due to the relative low investment risk and abundant liquidity. Meanwhile, the evaluation of potential asset recycling is ongoing for divestment. In summary, a further strengthened portfolio with a better balanced exposure across APAC will better and enable us to generate attractive risk rated with adjusted returns for our unitholders. In addition, we also aim to expand our investment management capabilities under link in our target APAC markets. This would enable us to work with and provide services for third-party capital providers. And finally, it is worth remembering that while we have laid out our plans, the change from the strategy will take time to bear fruit. We have the evolution by upgrading the management team over the last few years, refreshing the Board more recently, realigning our processes and upgrading our systems, which is ongoing. Building on our strengths and executing the strategy organically, inorganic opportunities also be selectively and prudently evaluated to accelerate the development and growth of the Link REIT portfolio as well as our investment management capabilities. We stay vigilant, agile and adaptive to navigate the risks and seize opportunities ahead. Lastly, here are the dates for the payment of distribution with SCRIP election for your information. The landscape is ever shifting and along with it, different challenges and opportunities in the market and sectors that we operate in. Our focus on continuing optimization of the portfolio, in addition to this diversification, has paid off in the form of its resilience. This has enabled us to continue to provide our unitholders with a stable return and sustainable long-term growth, despite external headwinds. Under Link 3.0, we aim to create value for our unitholders, and this is to be achieved by diversifying the Link REIT portfolio into APAC and other asset classes, as well as expanding the investment management business through providing services for third-party capital partners. As we embark on this long-haul journey, we will continue to focus on the interest of the unitholders, as well as alignment with capital partners and other stakeholders. Let's move on to our Q&A session.

Thank you, Duncan, George, K.S., and Greg for the sharing. So now we come to Q&A section. [Operator Instructions] So first one. Okay. So you're the fastest. Karl please?

This is Karl Chan from JPMorgan. I have 2 questions. My first question is for Duncan because you are the new chair for Link REIT. Just curious if you could share a bit about how you see Link REIT in, let's say, 5 years' time? And what would be your KPI for Link REIT? That's my first question. And then the second question is more about the Hong Kong retail sales because we did see some narrowing in the year-on-year decline in the second quarter. So I was just wondering if you can share a bit more color on how the trend has been like since October? Do we see improvement, more stabilization in the Hong Kong tenant sales? And then we are glad to see that we are still able to achieve a positive 0.7% positive rental refreshing. But then going forward in the second half, do we expect a similar mildly positive trend? Or are we sticking to the previous guidance where we expect a flattish rental reversion in Hong Kong retail. So that would be my second question.

Thank you. I will hand the second part of the question to Greg to my left, your right. It's quite interesting. We are in a period of great uncertainty, which dictates that we should be cautious in what we do. At the same time, we should evolve the business, which is very different to revolution of the business, but we should make sure what we do in any analysis is compelling. We need to differentiate ourselves moving forward. So the 3.0 and how that should look from our perspective is, we currently have a strong portfolio that's proving more resilient than we thought. But we need to look for new assets to improve the quality of the earnings' streams in, say, 5 years' time. What that means is we're looking capital and real estate partners that will invest alongside us into assets that we would want our unitholders to benefit from, but we may not otherwise be able to invest in them as quickly or as agile a manner that we could if we only did it on our balance sheet. So the key word for me with 3.0 is we would want alignment with our new partners and investors, and we would want to be doing things that we should be doing to improve the investment performance for our unitholders alongside those new partners. Yes. We might get paid for doing that on behalf of others, but we will be protecting our balance sheet, and they will be compelling business cases where we see there are low points in the cycle appearing. So would I predict and give you an answer where we are in 5 years? No. I think some people are doing it and it suits their investors but each strategy should be fit for purpose. I think for Link, where we are with our existing portfolio, the best thing that we can be is not to overpromise. It won't be easy, It's to make sure that we're clear, it's compelling and we're deliberate and our strategy is fit for purpose for our shareholders, and they, first and foremost, benefit from that with a new line. I'll hand to Greg -- the second part of your question is clearly tough. I think we've as George just described, delivered a solid set of results. But clearly, those headwinds won't get any fainter, and we are realistic about that, and we have to be deliberate. And again, just as much of the new things we do, the things that we manage currently, it has to be unequivocally compelling business cases for us to invest our capital to get better returns in the future.

I think there was 2 questions in your segment there, Karl, one on sales and the other on reversion. So just on sales, can we go to, I think it's Slide 17 just for reference, please? So we're clearly out the broader Hong Kong market. So this is something we track quite regularly. The other aspect is tenant sales index that we put there from the pre-social unrest. So we're -- for 2 of our 3 main categories we're above the spend or sales at that point in time. And for general retail, we're down. From a portfolio basis, we're only a very slight 180 basis points down on the period of '18, '19, whereas the Hong Kong market, is it 76.7%. So a big difference. It just shows the purpose and I guess, positioning of our portfolio and being a nondiscretionary focused REIT. The sales performance, I think we're comping lower numbers from the prior corresponding period as we get through the period. So I expect the sales decline for our portfolio to get less. But on the leasing reversion side, I don't think we'll be in a position to preserve that 0.7% position that we've got at the moment. The leasing market is incredibly challenged. The work that our very large and experienced leasing team is undertaking on a day-to-day basis is really challenging. You will have seen from a number of the listed retailers here in Hong Kong that have reported recently with some profit warnings, and that is not going unnoticed. So we'll continue to preserve very meaningful relationships with our retailers. We'll be dealing with each of them on a case-by-case situation. But I would anticipate that the reversions in the second half will deteriorate from the 0.7% that we've reported today. And we'll be focused on preserving our portfolio occupancy. So for us to be able to preserve our occupancy to what it was at the full year at March is a very, very good position, and that's our real primary focus at the moment. I will also add finally that our occupancy cost, at circa 13% across the portfolio, puts us in a pretty reasonable position to weather the storm, but working closely with our retailers is what it's all about.

Sam?

Congrats on the good results. I have 2 questions, if I may. First is on the follow-up on Hong Kong retail. So on that reversion slowing down part, right? I just wonder what is the right occupancy cost for Hong Kong going forward? Because right I think occupancy cost is 13.1%. Before, I think at peak, it's roughly around 13.5%. So is it structurally we are seeing lower occupancy cost in Hong Kong? So that's the first question. And then secondly, regarding the strategy part, I think more Hong Kong property companies are advocating regionalization and asset-light strategy. So I just want to see how you think about the competition in asset sourcing and fundraising in the future.

I'll take the question on occupancy cost. And if you look in the presentation materials there, we obviously segment across the four main categories. On a blended portfolio basis, I think anywhere close to 14% is acceptable. The one thing -- and I think we spoke about this at the full year -- is the 1 major concern that I have personally is just the erosion of margin for the retailers with increased costs, whether it be labor cost with the increase to the minimum wage, or alternatively, just the cost of utilities and general inflationary pressures is putting pressure on the P&L of all of our retailers. So it's a long game that we play. It's a matter of preserving occupancy. And I think you'll see that we would sacrifice a little bit of reversion to preserve portfolio occupancy and making sure that our retailers are profitable and sustainable.

On the point of strategy, I'll let George expand in just a moment. I think the benefit of the APAC region is it is very, very diverse. A number of its economic cycles as real estate markets move at slightly different times that they may not be in perfect synch. They're echoes of 1 another, and it gives us the advantage to improve the quality of our earnings by being in other key markets so long as those business cases are absolutely compelling. At the risk of repeating myself, it will be evolution for us. won't believe that we will automatically have a right to go into any new markets where there are already good competitors who have been doing it often for over a century. So we will build teams and capability, and we will do it in a measured and careful way.

Well, as we diversified, we're face with obviously new competitors every time we go to a new center, a new geography. As Duncan mentioned, both locals and those who go there from elsewhere, that's something that we're quite used to. But I think in order to prepare ourselves, I mentioned briefly the upgrade of the management team, adding to that capability and continuing adding to that, getting the system ready so that as we powered on more assets for us to manage and analyze that we do it on an efficient manner. There's a lot more technology from facility management to lease CRM systems and all that, that we have installed over the last few years. I think those will continue to help us to strengthen the asset management capability that we have. I think these days, especially capital partners that 1 talks to not just looking for someone who will help them to allocate capital, but to help to manage and drive value out of those assets. So those manager who actually have that capability and demonstrated over many years of how to work asset hard, will probably get a return of their phone calls, and so hopefully we will be able to deliver on that. The diversification itself is necessary if you look backwards, that if we haven't done it, we would have seen a drop in distribution already, given the challenge in Hong Kong and China. Going forward, I think what we want to do, make sure is that it's done in even more methodical way with a lot more analysis to make sure that we indeed will be able to deliver that consistent resilient distribution. Not easy, but I think as Duncan have said, we'll tell you more we deliver. I think we don't want to overpromise. It is a challenging market out there both on operation and also in fundraising. But we are hopeful and we're putting together the best team to do that.

Cindy?

This is Cindy from Citi. I have 2 questions. First is as well on your Link [indiscernible] strategy. I just want to hear your thoughts on what are the biggest bottlenecks in executing this strategy from the time being? And in talking about the potential more balanced optimal portfolio, how Hong Kong's positioning and the proportion within the strategy? Will it be a more actively looking for divestment? Or how should we think about that? This is the first question. And the second question is for your mentioning on the growth of nonrental income. Just wondering if there's any more color on that.

I'll take the first, which may have 2 or 3 hidden in it. And I'll hand over to Greg, but it may well be -- there's also some comments from K.S. on the Chinese perspective as well for the Mainland. Yes, we should look to recycle capital for it to be efficient. That won't be easy, and we will not be in a position where we go through a cycle and we're sellers at the bottom of a cycle. Yes, we will need new capital partners to work alongside our balance sheet to take the new opportunities. So both those steps in 3.0 are hard. There are many good entities, both local REITs, as well as international managers, that do that and are very proficient of it. So it's not easy. It's a competitive landscape that's rich. However, if you bring a disciplined approach to sectors, cities, types of assets, you can really benefit from this time in the cycle where polarization is a really keyword for what's happening in different sectors, different countries. And it will prove, I believe, in 4 or 5 years' time, to have been a good time to be taking advantage of a number of those points in the cycle. Noting importantly, George's point, you have to also be able to operate those, and that may be a competitive advantage that Link has because it has a very strong track record in operating assets, which it can dovetail well with its investment management capability. Greg?

On the non-shop or non-traditional income, very early days for us, Cindy. We're exploring a number of opportunities how we can monetize the common areas of our properties. The amount of footfall that we generate, the style of custom that we deliver through our assets on a day-to-day basis I think provides us with a pretty unique opportunity to monetize those common areas in a number of different ways. The example that I spoke to today around the solar and the tariff feed-in rates that we're securing is providing a very good return for a very limited investment. We think we can expand that program further. Ultimately, the thing for me in looking at our income streams, our non-rental income or nontraditional income is not a high enough percentage as it should be. So we're working on a number of strategies. It will take us some time, but the team's very engaged in exploring what we can do to increase our revenue streams.

Mark?

This is Mark Leung from UBS. I have a follow-up question regarding on the nonrental income. Because I look at the first half results, I think the management fee as well as the air conditioning fee was up by around 14% to 15% in this first half. Just, I think Greg, you mentioned that the -- many of the tenants, they may issue profit warning. Do you think that growth rate will be -- this strong will be sustainable? I think that's the first question. And also, if we take a part into the occupancy cost, do you think we are -- what kind of level are we versus our internal? Maybe at same level? What kind of level is it?

Okay. So just on the management fee recovery, that's a catch-up -- so we weren't recovering our full expense load for the management of the assets. So it's a one-off increase to bring us back to a recovery. So we're not looking at extending it again in the near term. And sorry, the second question, Mark, I just didn't catch. Yes. Yes. So again, the base occupancy cost is ultimately sustainable. The other, I guess, leading factors that we look at is our reversion rate, our retention rate. Our retention rates are just under 80%, which is normalized. So all of the lead indicators for us would demonstrate that there is a general affordability to the metrics that we're currently delivering. But as I said in the previous question to Karl, is, the concern is just the overall margins for the retailers are under pressure. And it's something that we have to deal with on a case-by-case situation.

Okay. Due to the time limit, we can have 2 more questions. Praveen?

This is Praveen Choudhary from Morgan Stanley. The first question is about the cap rate. I saw that the cap rate universally has been raised a bit in a market where rates are supposed to go down. So just wanted to understand the outlook for that in future. Obviously, it's interplay of future rental, as well as interest rate, but I just wanted to get your thoughts. The second question is more on 3.0. I think Duncan, you've tried to answer that many times. So maybe you're going to repeat. But the question here is, a lot of your competitors are also trying to do the same thing, as we have seen. So it's already a very competitive market. We are making it even more competitive. And you're saying that you want to only do it if it's accretive to the unitholders, so you're putting another layer of it. It's not just to grow the asset size, making it even more difficult. What exactly is differentiating the strategy? I understand you manage asset very well, but a lot of your competitors might say that as well. So I'm just thinking, it's been 2, 3 years of talking about 3.0. I mean, and we understand it's not a revolution, it's evolution. How long do we wait before we see the first instance of some kind of fee income generation?

Okay. I'll hand in a moment to George certainly on the cap rate question. I've got some views, but I'm sure George could easily answer that. If I deal with 3.0, I don't think we should be arrogant to think we're better than other managers out there or any other manager out there. But we do have some longevity in track record of managing intensively operational assets, fixing and improving them, and driving earnings forward. That is a compelling business case. It is hard for competitors to necessarily replicate that aspect of our track record. In addition to that, the new team we have led by John Saunders on the investment has its own track record, which is established and through the APAC region and indeed, covers many of the target markets that George and others have been talking about today through Japan, Australia, Singapore, et cetera. So if you're an LP -- and I've been both a GP and an LP in the past -- you look first and foremost for track record for differentiation. You'll then look for co-investment, which we will be capable of offering, and very much we desire to co-invest because we want to invest in superior assets. And you'll then look to the manager for the science and not a manager that might just say I want to grow AUM or have some of misplaced KPI that's not aligned with investors' best interest. And I think dealing with it, I'm picking it in those 3 ways and dealing with that with integrity is attractive to capital partners because they see what is good for us, we are investing in, and we have a track record of doing it. I'm not pretending for one moment there are some very strong competitors out there, some of whom have been doing it for a long period of time. But the investment universe is big. The universe is valued -- is the market pricing in many points, is at a low point in the cycle. And what most managers want is to have capital to invest as these types of times come in the cycle. It is better to be investing in the next 12 to 24 months than it would have been in the previous 12 to 24 months. And I mention that partly in reference to the last part of your question on 3.0 about this having taken some time. I think the discipline the Board, that I contain no credit for, have exercised in care and attention and shown discipline to not invest too early in the cycle is quite good evidence. So in 4 or 5 years' time, we'll see, but hope that answers the 3.0 part. Cap rates, George?

I'll jump to cap rate, but I want to do want to supplement this, tell you a bit of an inner secret. Duncan is just arriving as a Chairman, seeing how the Board operates, the discipline that we have gone through. Perhaps what is instructional is that we talk about Link 3.0, as you know, for 2 years. You are asking when is the next public step, which will be coming soon, I hope. But we can't talk about it until actually we've done it. But again, this goes back to what I said earlier. We'll tell you more when we've done it. We don't want to overpromise. And if I do it again, maybe I won't tell you 2 years ago and tell you next year. But the point really is, it's a long journey because system needs to be ready. Documents need to be ready. The team needs to be ready. The Board needs to be ready. Our capital partners need to be on our side. All stars need to be aligned in order to make this work. And we told you that we are going into this strategy, we are getting the stars align, which takes time. It's getting there. Hopefully, we'll have to tell you very soon. So if that give you a better sort of context and why we are more cautious when we hear other peers to talk more boldly, we would rather just be a bit more cautious. It is a challenging world out there. The cap rate and interest rate, anyone who have been training a surveyor will know that they never get the number right. So it's difficult and it is more difficult today than ever before because there is no transaction comparable. So when you do a DCF normally, then you compare it with transaction and see whether it makes sense and all that. And you do a DCF and then you say, well, there's no transaction. There's a [ distress ] transaction and then you say, oh, it's distress issue, you shouldn't take the count of it or you make an adjustment to it. Then the other point is you look across market when Australia is trading at a much higher cap rate and Hong Kong is at a low cap rate, is Hong Kong over value? We don't know. I don't think none of us are that smart in working it out. So there is a focus on making sure that we continue to work on the asset, delivering on the distribution. Valuation is what value has said. And we hope that market liquidity will come back soon. You usually see the sort of uncertainty at the turn of the market. I don't know whether we reach the bottom or past the bottom, but we're getting close to it which is why there is, I guess, a lot of contradicting views. And that's usually where the market starts to turn. Exact point, I think we're all betting. But hopefully, we'll get it right. But the valuation is what it is. It's very hard to know. But the other thing I would say is we did start to map down our valuation from COVID. And I think some of our peers haven't done that. We've been quite aggressive in doing so. I think there is still in some markets that need to do so. Australia office is one that we still mark down quite a bit. The incentive has been very high, actually even stabilizing. So maybe there's still a -- there's a lacking factor on how they do it. So hopefully, we are near the bottom as well.

Do you have the very last one, or else I will ask a quick one from the online. So [indiscernible] asking about update on 3.0. I think we covered most of it. And then the other part is, given your existing HKD 237 billion rental portfolio across Asia, what would be your ideal size of asset management AUM?

Let me take that. The size of AUM is a consequence of getting it right. The objective of an AUM is not necessarily a great KPI for growth sake. If you invest in the right assets and you drive the earnings growth, you will attract more capital as a consequence. But it is as a consequence of getting and step 1 and step 2 right for investors. So we can all be aspirational and talk about target AUM, but I think you need to focus on the process of what will get us the right AUM more than what the final AUM is. All assets under management are not equal. You need to be paid where it's not your capital appropriately. You don't need to raise AUM that's dilutive and you need to raise AUM that performs. So I would not answer the Goldman question about what the target is. I'd say what we're going to do in the process to achieve that target.

So I guess we come to the end of the briefing. So thanks, Chair and the management, for your sharing and the insights. And thanks, everyone, for joining us today. Have a great evening. Thank you.