© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Before we start, I'd like to introduce the CICT team today. We have Tony, our CEO; Mei Lian, our CFO; Jacqueline, our Head of Investment; Yi Zhuan, our Head of Portfolio Management; Mei Peng, our Head of Investor Relations; and I'm Clarisse, part of the IR team, together from our team Alice and Satish. Now I'd like to invite Tony to share his opening remarks. Tony, please?
So good morning, everyone. Thanks for [ dialing ] in. Hope we had a good long year end. As you probably have digested last Friday, we released our third quarter operating update. And just a short -- some short remarks. I suppose over the weekends and perhaps a little bit time this morning, we may have time to digest the info. And following my short remarks, I think we can go straight to Q&A. So third quarter, I don't think anything was surprising. It's just a continuation of the impact from the reopening further relaxation that we've seen at the end of -- in fact, from beginning from -- the beginning of May -- in April, May and with further relaxation on -- especially on the loss mandate. We certainly see an uptick in activity, both in the retail side and the office side. So that translate into the relatively strong operating metrics that you see on screen here with -- of course, coupled with the lower base that we see from third quarter last year, we've seen a very nice rebound in traffic number in the retail side as well as the sales side. Things to point, to note that we have seen not unsurprisingly a much stronger rebound from the Downtown Mall, compared to Suburban Mall given where they have been impacted more compared to the Suburban, but also importantly, some of the things that have been underpinning the strong rebound from in Downtown Mall, things like the more people returning to work, you get further relaxation in the border and we get more influx of business traveler and tourists. At the same time, I think the general sentiment has been pretty positive on the ground and have seen people are flocking back to the mall and hence, you see a nice trading outlook. I mean, following that, obviously, the office space, I think, has been also gaining some traction. Actually, we have seen our occupancy with back fuel, especially Capital Tower, majority of the space that's been vacated by JPMorgan, the anchor space with the remaining that was already in a given stage of documentation or negotiation. So we are generally positive in our office portfolio towards the end of the year. Similarly, I think we are relatively positive as well for the retail space towards the end of the year. Of course, I think on everyone's mind is the general macro outlook. That's no different from us. Notwithstanding a -- I think a strong fundamental underpinning Singapore position vis-a-vis a regional country or around the world. We do know that the headwinds are potentially coming, especially on the cost side, on the energy side as well as the interest rate side that will affect both the interest costs as well as the operating -- overall OpEx as well. But we're trying to manage that as best as possible. We enter into this storm in generally in a pretty good shape. Our balance sheet has been quite robust with a fairly conservative capital management strategy that we have undertaken for years that now we are seeing that being able to play out in the market and the way that we are able to more nimble to maneuver according to things that happen in the marketplace. So I think that gives us a little bit of a level to look at how we could better manage and navigate through such a volatile environment. I think with that, I will just pause here, and then we can go straight to Q&A.
Thanks, Tony. [Operator Instructions] Actually, we have a few raise hands. Donald, please go ahead.
Tony, this is Donald. A couple of quick questions. First is given the continuous turnaround in the retail reversions and tenant sales. Where is occupancy costs at this point? And how does this compare to prepandemic? That is my first question.
Okay. So I think it's tracking fairly in line with what we see prepandemic. And of course, you're looking at it more from a portfolio perspective. January has still been quite healthy within the range of high 17% to asset portfolio to about 20%. Within that, obviously, some of the properties are probably trading at a lower end. And this depends on the construction your trade exposure. But I think we are -- we're in a good shape about.
So 17%, they still below -- pretty much below prepandemic, where we went as high as 19%, 20%. Would you say that there is some scope to -- for rent growth, at least in the next couple of quarters?
Yes, that's certainly something we pricing you probably have seen on the sequential basis, the rental reversions have been improving, more so for Suburban. But even true for these Downtown Mall now that you've seen a little bit of revival in the Downtown. In fact, Downtown Mall, we are tracking quite closely as [indiscernible] still positive as well for the quarter.
Got it. My second question very quickly is on Raffles City, the Hotels segment, which hasn't really been talked about much. How has the room rates now compared to prepandemic and are we seeing a key driver of revenues coming from this space?
Yes. Hotel mix up is probably above 10% to 12% of the Raffles City contribution. Overall, if you look at the -- what they have published in the website, right? It can more or less have a sense where they have adjusted the room rate, ballpark, I would say, about 2 to 3 times higher than prepandemic, yes.
Okay. Got it. I'll leave the other questions from other people. I'll come back later.
Mervin, would you like to ask a question?
Tony and team, yes. I just want to check on the tenant sales for both Suburban and Downtown. How do they compare versus prepandemic as you disclosed year-on-year growth? And second question I had would be in terms of the rental reversions going forward. How high can you push because obviously, tenants were looking at it from both rent plus service charges. And I keep reading about salaries being lifted for their staff as well. So maybe some thoughts on that.
I think overall, it just has been trending. In fact, even Downtown Mall up to year-to-date September is already quite close to 2019 level, it's just marginally very small 0.1% -- in fact, [ 0.1% ] at 2019 levels. So I think overall, the sales has been tracking well. Of course, it's also a function of some CPI link because obviously, the retail price has gone up as well. So they are contributing factor to that. In terms of where we are pricing power, certainly, we are trying to adjust this base, especially retail, right? As you probably know, we are somewhat constrained by what we can do from -- because of the COC, that we have agreed upon with the retailers. So even though we may want to look at adjusting service charge, there are some limitations of what we can do. We can only do that for leases that are expiring. So we can do a very broad -- back envelope type calculation roughly about 1/3 of our retail space, typically, will be expiring. And then that's where I think we'll make some adjustment in the service charges. So that potentially can see some coverage, but it's a little bit delayed. But for the -- broadly for the retail side, part of the partner arrangement with the retailer group is that for energy costs, obviously, they wanted a full pass-through. And then that will be -- in fact, that has been already executed in that will somewhat also mitigate part of the cost that we feel we face in the operation. So there are some mitigating factors that we have to look at it when we look at pricing the rent and [ bill ] adjustment. So I don't know whether to recall, I give many examples. I'll give some examples in a couple of my briefing, right, that for expiring leases and sometimes for existing lease, we can certainly can adjust the rate. So if service charge may go up, but you can't adjust the gross rent. And this is what it is, right? For the expiring one, we can look at adjusting the service charge according to the elevated operating cost of the building. That will be applied to the expiring one. So that's the only 1 that will be able to be effective. So we'll factor that into our adjustment from the rental perspective. Bear in mind that from a retailer perspective, they're only looking at overall the gross rent -- so today's gross rent is $10 and that may have a component of service charge and the rent component. Ultimately, they're only looking at the gross rent in the new lease that we signed with them. So we have to factor that in as well the elevated costs, what you can price in into the service charge and if we look at overall the environment and we factor that in the rental reversion. And you varies from trade to trade on. So some of the tenants are already trading so well, it's a -- I mean it's a nonevent that you adjust it in and our pricing accordingly. They are still operating in a pretty healthy occupancy cost ratio. So those are -- I think those are easy, low-hanging fruit. The more tricky ones are those trades that we still want them to be in. They need to be in for a variety of reasons and the question is on pricing. So that will always be the trade-off that we are doing the adjustment on. But generally, yes, I think they are mechanism in looking at how we could factor into our rental reversion, including the ability to adjust the service charges as well yes.
So just to clarify the tenant sales as a percentage of people is at pre-COVID level since it's temporary. And I think from memory Suburban was already above. Well, ended mix between Suburban and Downtown.
Yes. So overall, as a portfolio, we're looking about close to about -- in fact, more than 4%, 4% pre-COVID. Downtown, let's say, quite flat slight negative, minus 0.1%. The Suburban, we're looking at 5%, yes.
So in terms of the -- I mean, there's no clear answer in terms of the rental reversions. But can I presume that it could be remaining around the current rental reversions that you're reporting some of a flattish for Downtown given the service charge impact in terms of total gross rent and in Suburban, that 1, maybe 1-ish to...
I think we started the pricing, like the question you mentioned, right, even in fourth quarter, we are looking at misses that we do in first quarter, and we're all the way up to the second quarter, depending on the kind of tenant. So we started to look at pricing in we should potentially see a further improvement in the numbers in the fourth quarter to be reported, yes.
And just finally, maybe an update in terms of the expiry of the electricity cost hedges have they all started to roll off already?
Yes. So you'll be rolling off towards the end of the year at the elevated level. But it's not as elevated as current market. So we expect -- while we look into further hedges, we actually partly locked in part of the energy cost for the first part of next year because we have secured the capacity. I think one of the key concern for many energy consumer with the ability to secure on a bulk basis, the energy supply to manage the operation. So I think we have secured that for the next 2 years. Now we are just looking at a -- but then hopefully some moderation on where the brand price is trading and the dollar in exchange rate is for. But we're locking part of it in the first half of the year. It's still to go up further. We I think the -- based on the current situation, we've seen in the international market, and I think it's no surprise that the energy costs remain elevated. The natural gas supply remained distorted because of the issue in Europe and overall and hence, I think the volatility and the tightness of the -- those important component that goes to producing electricity will still be there, unless we see a meaningful -- either a significant slowdown in growth globally, which will lead to a significant adjustment in the rent price or perhaps the end of the war and then we see a more normalization of the gas situation, yes.
Next, can we have Brandon. Please go ahead and unmute yourself.
Just 2 questions, right? The first one, can you update us on the refinancing costs that you did for some of the loans this quarter? And what kind of rates and also what could we see for the MTNs that are due for the next second half of this year?
Okay. I'll leave that Mei Lian to explain. I think generally the spread has been relatively stable. It's only the base has been moving. But I think in my earlier remark that we -- fortunately, we have been very prudent over the last 5 to 10 years that taking advantage on the generally very flat in a [indiscernible] region at a fixed rate. Now that the market has been very distorted and the you could be so inverted, I think we have some flexibility to look at how we want to manage the capital. I'll leave it to Mei Lian.
Yes. I think in terms of the refi, we have actually completed all the refi deals this year. We are looking [ green bond ] for new refinancing facility for the 2022 maturities. What Tony mentioned in terms of [indiscernible] in terms of available [ of lines ], we have achieved sufficient line to pick up [indiscernible] and free that power. So for the recent refinancing in third Q, there was actually one refinancing that was done. That is the reliable JV debt [indiscernible] stream. So that one is to go over for 3 years with the approval of banks. In terms of credit spread, it is actually variation [indiscernible]. So there were no fixed rate debt issuance this quarter.
Yes. Maybe I can just add on Brandon, you're looking at ordering costs, right, depending on the duration at 10 the things lock in. Today, the shop rate is pretty high, it's very elevated, in order to spread, I think it's definitely not a 4%, probably [ 18.5% ], I would say yes. And that depends on the duration, you are looking at 3 years or looking at 5 to 10 years then the -- you'll be slightly different. But the shorter end of the curve is very elevated for the reason everyone knows. The longer end is coming off and is remaining very stable, which means that we think that the short end will react quite -- quite quickly the moment we have some clarity where the base rate will end, yes.
So just a follow-up on that, right? For your hedging strategy in this market, are you looking at 50%, 75%, 100%. And are you looking to hedge 1 year so or 3 years?
Mei Lian?
I think we are currently at 80%. We're looking at a range of not less than 70%. So I think currently where you see that kind of target range of the that we want to. We are watching the market as it goes in terms of when it's a good time to hedge. Right now, we see like the longer end of the income makes sense [indiscernible] in the more than [indiscernible] expense.
Okay. Just one last one on portfolio reconstitution. I think given where rates are on your cost of equity, what can we be looking at in terms of acquisitions, divestments as well as development projects?
Yes. I think in an environment like this, where we lack clarity, right, certainly, prudent is the word to use them. We have to be very prudent in how we look at capital deployment. And hopefully wait for more clarity on how things will settle down because the cost of capital will just be so softer, in today's environment. And if you were to undertake any kind of equity fund rates in today's market obviously will be a no-no. So it is something that we're watching carefully, definitely been prudent. We would still look at opportunity, not that we pass it. It's just a question of whether we are able to look at an opportunity that first must pick the portfolio. Second, whether is at the right cost of capital yes.
On capital management, we actually have a similar question on from the -- question is what is the sustainable average cost of debt in the medium term?
Mei Lian, will you take that? just interesting.
In regards to the course of that, we will be at the forecast next year, we'll be closer to the level of Q4, even on a short-term basis because of the [indiscernible] curve.
Next, can we have Rachel?
Following up on Brandon's questions under high interest rates. I was wondering whether you do expect cap rates, any movement in cap rates by end of the year or do you see how [indiscernible] cap rates do?
Okay. I got -- I hear your question on cap rate, right? I think it will be stable in Singapore. The general market, I think general momentum is still healthy. So we don't expect any kind of significant movement or any major movement in cap rate now. If anything it will be broad, maybe some other adjustment that this was Singapore I think in the overseas market, we are watching, potentially, there could be some movement in the cap rate on expansion side. I think we started the process looking at the year-end valuation the general sensing is that there could be potentially -- especially in Europe, like Germany, where the value may start to look at a -- not so much a cap rate but more on the adjustment to the discount rate and potentially some movement in cap rates. So we are still waiting for that, but it's not unsurprising given the situation in Europe.
Okay. Got it. Maybe my question is just on tenant sales. I mean, it is pretty strong now for this year and slightly [indiscernible] -- what is the outlook for the next year? And even [indiscernible] as positive tenant sales next year and it's [indiscernible].
Yes, that's really the macro question, right? On Singapore, I think overall, we fair well next year may see a slowdown, and it is probably not in contrast to any of the year outlook given the MTI they're looking at a [indiscernible] to next year. So I think generally, there will be this kind of backdrop that will be at the back of the consumer's mind. As at the moment, a few things that still seems very supportive. For example, the employment number is still looking pretty strong. We have not seen any how significant adjustment to the workforce in Singapore. In fact, on the contrary, I think the many companies are still looking to most start to taper down their hiring, but those that really need the manpower they continue to look for tenant around not just in Singapore but around the region, right, around the world. So from an overall macro point of view, there will be a bit of a conflicting kind of process. On one hand, tight labor market, no wage inflation is there. On the other hand, we see a potential moving to slowdown. I think our government policy was going to be key. How they look at navigating through this very tricky environment. [ A few banks support ] naturally as a result of all the geopolitical tension you're seeing, Southeast Asia, I think, still looking pretty bright many companies and countries are supporting the business expansion in Southeast Asia. So I think that's looking pretty bright. India, as market beginning to look as a very viable alternative to what we're seeing China. So that will underpin a little bit in terms of overall investment growth and potentially also the general economic velocity in this part of the world and Singapore, I think we tend to benefit from that. So I think there are some strong fundamentals that will help support and underpin that strong foundation moving to [indiscernible] but nevertheless, like we mentioned, at the end of the day, the macro is the key. I think we need to see some tapering in the inflation pressure because otherwise, you will just be adding on to which pressure and it will be a vicious cycle. So far, I think EMEA has been quite clear. Inflation management is key. But at the same time, we are also careful about making sure our pricing Singapore are out of competition. So in short, I would say we'll enter 2023 with a little bit of caution but supported by some strong fundamentals, and it will be a very -- I will say, it will be quite -- I don't want to use to go volatile anymore because the market has been pricing in quite a fair bit of volatility. Hopefully, we'll see a lower level of volatility and over time, the general business about how the capital market will look like and hence, all this impact on the cost of capital will ease. And I think some normality, we're thinking, hopefully, will be in the first half of the year, yes.
Just one last question for me, just on the market conditions and [indiscernible] you think it is possible to do any guidance?
Well, we certainly would not cost that off as part of the overall strategy, we are always open to fine tune and look at our portfolio quite strong, it's always in a long-term perspective. Sometimes in the short, medium term, we may react because there were interesting development and hence, we can react to it and make capital work in a different way.
So we on and off, we look at our portfolio from stock. But I think we have been quite clear in our strategy overall Singapore will be still pretty predominant in the overall construct for foreseeable future. We want some optionality in terms of income stream, given that we are also looking at some upscaling region potential within our portfolio, yet potentially can create a bit of volatility in terms of cash flow income and we need to be pragmatic. At some point, you just can't be pinning in one source of provider of opportunity. So we have been quite clear that in the long -- mid to longer term, we need to have some very favorable options to look at, but the construct will still be very heavy in Singapore, given the absolute capital value to begin with is much, much larger than the other market where we have invested in.
Next, can we have Vijay from RHB?
Tony, can you hear me? I have a couple of questions. Maybe my first question is, again, a bit of a follow-up on the acquisitions and types of spends. Considering the market conditions, how does this change your acquisition strategy in terms of portfolio deals, for example, the [ Metates ] portfolio. Would you -- I mean this asset, as you mentioned, Singapore is a strong market and it might be a strategic fit for your portfolio. Would you consider still pursuing these kind of acquisitions in this market possibly via equity fundraising? Or would there still would this be a no no at this point of time?
Yes. So I did mention in my opening and there's some questions that raised. I think today's market is in today's market as in now, equity fund raise is definitely out of the questions, right? It's not something we want to contemplate. And that's how we look at it from an investment perspective. Anything more than what costs we just have to wait for what the markets eventually with release. At this point time, naturally we know that the capital market is not really for a transaction like this.
Got it. In terms of the utility charges, you mentioned that you have secured some contracts by 2020 moving forward at a higher rate. Maybe can you give us some impact of what would be the potential impact to the bottom line based on the higher rate which you have secured for 2023 in terms of equity charges?
Yes. So we've -- so far year-to-date, we are looking at about [ 15 ] -- close to 60% increase. And I think we projected for the full year depending on the consumption level, we were actually looking at close to 80%, 90% for this year compared to 2021. I think in 2021, we ended the year on a very low rate, right? Potentially, we can see in '23, if nothing else changed and the price stays at this elevated level, potentially another 80% to 90% increase in terms of tariff rate that potentially could come into the picture. And that's where we start to look at how we're going to price it from a service charge perspective, adjustment given that there are different dynamics we have in the retail tenants and office tenants. I think office tenants a lot more straightforward. It's the 2 plus 2, and we could technically adjust from day 1 which we have announced, some of the buildings that we adjusted.
For the retail, I think we just have to be cognizant that we have a COC that we have to comply with. And then we adjust accordingly and look at the different trade sector that we are -- the tenant that they are in and their threshold and we look at how we can moderate that over the maturity cycle. So 1/3 ballpark 1/3 will mature for retail space on average, we're looking at about 2 to 3 years kind of a time frame for us to fully pricing energy cost adjustment. Of course, along the way, if energy level dropped is something that we have to factor in as well. But certainly, we are looking at more 2 to 3 years type of time line to repricing any kind of service change that we would capture the -- especially the energy cost.
Okay. So just to clarify on this, the service charges is built into the part of the gross rents. So the gross rent reversions, whatever you report for retail and office that does include the service charge adjustment to trading, is that right?
Correct. It's just that we think that gross rent then you split, right, because from -- either from protect perspective or from a justification to tenant perspective, that's how we split the overall gross rent, yes.
Okay. Can you just give some -- my last question, can you just give some color in terms of Australia and Germany of this market demand at this point of time and especially the Arthur Street building. Do you think that you can crumb back to 90% levels which you have assumed during the acquisitions at a point of time?
Yes. So let me touch on Australia first. I think Australia, if you recall when we did the acquisition, we also had negotiated a period of time, we think that we need, especially the one at the low occupancy to ramp it out. So we are still working within the 12 to 18 months' time frame. So that rental support actually comes quite healthy. Generally, on the [ ground ] Australia, I don't know whether you have visited before in Sydney it's busy on a weekday. I think the phenomenon is even clearer when people talk about the flexible arrangement 3 days, 2 days, I think it's even clearer in Sydney where Friday is pretty quiet and a lot of activities circling around Monday to Thursday, with Tuesday, Wednesday simply very, very busy. So to go down to Sydney, I think that's what you see on the ground. I mean, even with our asset manager there, I think their own assessment is that this is going to be -- this phenomena is going to see on for a while. That to a large extent, we also we underpin how the office occupier looking at the space requirement. And there are some recalibration in terms of looking at what kind of flexible arrangement. So we're beginning to see what we see in Singapore, a bit of those [indiscernible] space operator becoming very active now because they are the providing more solution for the end occupier they been more active in the main city like Sydney and Melbourne. So I think we expect that to continue. In Singapore, it's quite clear over the last 12 months to 18 months in the course of the pandemic period, the flex space operator fill a gap in the market where the needs are satisfied in a more holistic way. And the target, of course, has changed somewhat from more less retail based or tenant or more into the enterprise side. So I don't -- I think that, that trend was set forth in Australia as well as certainly for the CBD. In Europe, I think it's a little bit more challenging given the war situation now. I think we -- it's not a wholesale withdraw occupier. What we are seeing in Frankfurt very specifically because we have 2 buildings there, it's just a sale maintenance. People are not doing anything at the moment. They are concerned about the general economic outlook. They are more concerned now with the immediate issue in the winter, how they are you going to deal with it? On the longer term, I think there's not much clarity. But we also think that with this issue ongoing and at the same time, the euro financing rate is no longer 0, it used to be when we did the merger, the 10-year bonds was staying at minus 60 basis points. Today, I think you're looking at more than 2.5%, and you're talking about catching up with the very high to [indiscernible] inflation. I think that will bring a lot of discipline to the market, which has been capped by decades, more than decades of -- even negative interest cost resulting in a lot of domain unnecessary redeployment. So I think there will be some sanity check. But nevertheless, I think in the short term, we'll be a little bit stalemate. In the mid longer term, we'll see how things pan out in Europe. For us, our 2 building has been, I would say, relatively stable. The building in the airport side, they were supported by, in fact, quite a big revival in terms of the traffic flow, the transport. So the economic activity has been picking up before the war just before the onset of the war.
With the onset of the war, the situation, I think, has flat out. I don't think it's seen a decline. They have been traveling has been still rather active because overall, I think the concern about the pandemic has been more or less put on back when. I think the more immediate concern is about the energy cost. So I think the traveling part has surprisingly been quite strong. So the airport activity is okay. The only way I think that we have to watch out for is the supply situation coming up on airport location there are a few new supply coming out, new building a bit smaller kind of smaller kind of assets, office, a lot of hospitality linked kind of building hotels are out there, some [indiscernible] space operating there. There's also a large building that is not far from where we are, where there's a big vacancy as a result of some downsizing, I think, about one year ago. So we are watching the space. Nonetheless, I think we're engaging our tenants. There are some tenants that are interacting, they wanted to return some space, and then they decided to -- when things pick up a little bit, they start to rethink. But now given the uncertainty in the market is a little bit radio silence. So we just have to watch and see how things do go from there. But overall, I think Europe is a little bit more challenged than in Australia.
And just one follow-up. Can you give us a physical occupancy in Singapore, Australia and Germany at this point of time in Europe assets. A broad number would be...
Sorry?
Physical occupancies, I mean the occupancy, the number of -- the percentage of people back in the office...
In Singapore, we are looking at -- on a portfolio average is about 60 -- mid-60s. On a -- and it varies from building to building, on a high days, it's more than 80% for some buildings. Most like for occupancy. I think people coming in, right [indiscernible]
Yes.
And then some buildings, we're looking at mid -- to half 50% kind of range. But then on days like Friday along and [indiscernible] is normal. So portfolio, we have been trending. I've seen some stabilization. We have been trending up. I think we reported in early part of this year. In fact, last year, we started reporting looking at returning rate line, we generally track quite closely, which is in a way, a good risk management tool for us. And we have been seeing them trending up. Now we are probably in the mid-60s. We think we see some stabilization around there. As more and more people returning back to office is probably around that level [indiscernible]. And one phenomenon naturally is, of course, we see also quite a bit of people moving in from overseas to bounce [ themselves ] in for to work out this location. Whether they will settle for a longer term, I think we are watching. Certainly, we get some inquiry of additional space given what happened, I think over the weekend, we think that the place will probably pick up yes.
Next can we have Nicholas to ask a question?
Yes. Tony, just 3 questions for me. And one is more of a follow-up from I didn't catch what you said on the [indiscernible] thing in response to Vijay. Did you say it was delayed or on hold? If not any sense of like a rough time line on that? The other question is when you're talking about service charge and the gross rent as a whole, from a property tax point of view, is it just the base rent that goes into the property tax calculation? In which case, if you kind of increase the service charge and the base rent comes down, is there some property tax savings for existing -- for you in terms of the existing leases? And then the last question is just on utilities costs where you said the 80% to 90% increase again, is that 80% to 90% on the already higher utilities cost base? Or is it on the 2021 level?
So [indiscernible], you just have to wait for their -- I mean, I can't comment as you see any time I can't comment. Specific for us, obviously, equity fund raising at this point in time, it's definitely a no no. So -- and we are very cognizant of the significant rise in terms of looking at capital cost pricing. So this is something that obviously will be weighing heavily on us, and we will definitely be one major consideration in the -- in this transaction.
The overall rent and how -- if that increase the baseline will come down, that will result in us having savings.
I will give some brief on how we look at it. Service charge definitely is a part of component on any occupier they look at it. They look at it both basis. But it's one element that we use it to look at how we could better manage the -- appropriately manage the cost of running a building and how that should be in the overseas market, you probably know that the overseas model has always pass-through a tenant essentially covers everything.
But in Singapore model, doesn't look that way now. So we try to balance out the service charge based on not just energy, I mean the total cost of operating the building, right? And that just [indiscernible] you stay in the residential development you pay out maintenance fee that it goes to an essentially to manage the maintenance of your property, no different from office building or any commercial building.
So we look at it from a pricing, the only difference is, of course, the commercial element. How much we are the pricing, the overall gross rent vis-a-vis maybe the service charge the same example, I had before, $10 let's say, existing tenant or paying $10. And within that $150 is service charge $850 is a rent because you have to break that down, right. On assuming today, we need $170 to be breakeven on managing the building that in a sense somehow has to be pricing in this negotiation. Whether it is $850 plus $170 or it would be just -- if the market is permissible if the tenant is trading very well at a very low occupancy cost. Then certainly, it will not be just a $850 plus $170 you're looking at. We're looking at -- then the rent component will come.
So it's about communicating to the tenant, how that should be looked at from the overall gross rent perspective. On the tax element, do you want to touch that?
Yes. Okay. So probably just to add on to what Tony mentioned. So actually, when the first project portfolio, total range right, including the service charge. So under IRS, there's sort of allowable items that we can clear on service charge. So for the retail component, right, when we adjust the pre charge, then definitely, there may be some kind of tax savings that we might get, but it wouldn't be very substantial at this point.
And I think the other one [ Satish updated ]. Okay. So I think the utility is actually the increase on -- a further increase on '23 -- sorry, further increase on year '22, yes.
Can we have the next question from Terence?
Thanks so much for the opportunity. I just had 3 very, very quick questions. On my first question to Mei Lian. I just wanted to clarify on a remark on 4.5% rate for -- interest rate for next year. Does that refer to the benchmark rate? Or is that the average interest cost that for the total debt? Could I also ask on the second question, what's the proportion of debt in Sing dollar, Aussie and euro? And finally, my third question, what's the uptick -- what's the reason for the uptick in gearing on a Q-on-Q basis?
The reason for the uptick is that, we did some drawdown for funding of operations, working in relation to FX funding. The interest rate I mentioned earlier, it is an all-in basis, including credit spend. And then the second question is -- can we ask whether... sorry. Yes. We had about 80% of our debt in denominated in Singapore dollars for -- equity cash in Singapore dollars.
Okay. Sorry, just to clarify, is this -- is there any impact on the change in ForEx in terms of -- in the gearing calculation, currently?
No. Because for our -- I would say, in terms of funding overseas investment, our hedge ratio is very high. Most of the funding taken was in either in euro or Aussie dollars. So in terms of hedging ratio for overseas investment is actually in excess of 90%.
Okay. So for the debt, basically present Sing dollar and the proportion in Aussie and Euro?
Can I get back to you on that?
Okay. Sure.
Terence, just to add on what Mei Lian said. I think the 4.5% is all in on today's we go to market and refine whatever outstanding debt.
Just so it's refinancing cost, that's not like the total average cost of debt for this year. Okay. That's very helpful.
Next, can we have Derek?
Just want to ask a few follow-up questions on interest rates and utility costs. We've done the sensitivity analysis assuming floating rates swap by 1 basis -- by 4 percentage point. But let's say, you assume that you refinance your fixed rate loans at current rates. Where do you see BPO impact for say 2023 and 2024? I just mention the other questions. And on the 4.5% interest rate, is that all 3-year or 5-year fixed? And then on energy costs, Tony, you mentioned you're passing through energy costs or renewal leases on using higher service charge. What's the net DPU impact on service costs on -- assuming your pass-through to renewals? Yes, that's my questions.
Okay. Maybe I'll answer the last part, and then I'll leave to Lian. Okay. So overall, I think our coverage ratio on -- energy is just alone energy, because energy is probably the biggest component in the service charts component. I think that the overall operating building for this time. We're looking at coverage ratio, about 30%, 40% because of the lack of time, right, like especially the retail side where you can only adjust [indiscernible] upon the renewal or you have the expiry and typically it's about 1/3.
For the office side, I think it's pretty high. We're looking at more about 90% coverage ratio. They may support every increase in dollar, looking at $0.90 recovery. And we're using that on a forward basis. So we have a projected view on how the energy price level would look like and that overall impact on the cost of the operating the building and that we adjusted in the service charges. So brand between 30%, 40% as of today, but gradually it should move up from -- as and when the leases expire, yes.
Well, based on India, we may have to answer this. I think last briefing you mentioned that you expect OpEx to rise by 5% because of energy costs. Is that net of your pass-through to customer form of prior submission, is that everything then or it's not?
When I said net offer, that's only for 2022, we are not -- that's only for the retail component, yes. But office, no, we are looking at only towards next year.
I see. And then on the overall basis, I guess, well, what do you expect overall OpEx to rise by in percentage terms for second half or maybe next year?
More part, we don't have that -- many don't have that. But if I were to do it back, I have a bit of calculation. Today, our OpEx expense is about energy partners about utility -- broadly utility is about 13%, right? 13% of OpEx. That may go up to another -- perhaps another 4% to 5%, maybe looking or more closer to 20%. Just by a ballpark, assuming that we are able to do some service charge recovery.
Next we have Terence Khi.
I have a question for Tony. If I look back to 2020, there was quite a bit of negative retail reversions. So since retail wheel is about 2 years and retail sales have recovered. Is it then fair to say that these particular tenants are starting to be the ones driving the improving reversions going into the third quarter?
Yes. So I think they are making sure both, because I think if you look at 2020, we did a fair bit of adjustment for the base rent and we also built in variable component, right. In our latest result, I think the variable rent is came stronger than what it would be today. Today we are tracking around an overall conditions close to about 7.5% turnover rent coming in compared to the typical you're looking about 5% to 6%. So there are some -- with compensating part maybe adjust the rent down. So correspondingly, when the tenant rate turn out, we are hoping obviously that what will be a sustainable occupancy cost for the specific tenant and where they're getting and how the uplift will look like and how it will. Yes, including factoring the political costs as a result of the energy production, yes.
Okay. And second question, I see that the margins have been pretty stable on a Q-on-Q basis despite the narrative of higher utilities cost, the 80% to 90% mentioned. So does it mean that not many of these electricity contracts have expired so far and that most of the impact is more backloaded fourth quarter on 2023?
Yes. The elevated -- so if you recall, I don't know whether you took note of that. In my previous briefing, I mentioned 2021 with a very low rate. We extended time check for the quarter today, again '22 at the recently low rate, again lock in at a little bit for the rest of the nine months. So for the first half results, it will have a mixture of a lower rate, higher rate, but the full impact will come in second half on the elevated rate because it's a new rig from April to September. So first -- the third quarter result in a way reflects through the full impact from the contracted elevated rate for 2022, and that will carry on to the fourth quarter as well.
Okay. Because if I observe your Q-on-Q numbers, third quarter NPI margins actually look to be pretty flat Q-on-Q, but it's okay. Maybe I'll take the question offline. Maybe another question would be -- just maybe could you comment on how the 2.5% cost on that is computed? Is it on a trailing 12-month basis? And if so, could you mind sharing what the cost of debt is for third quarter 2022 alone?
Yes, on a year-to-date basis, for our third quarter, we are about 2.1-ish.
Okay. Got it. And the last question, do you mind commenting on the Singapore office demand outlook? I think earlier in your narrative, you mentioned about power people are worried about the macro situation. So do you -- does it then ticker down to you expecting slower rent growth ahead?
So we have filled up quite a bit -- I mean, just can really talk about our own portfolio in January, right? So I think we'll fill up quite a bit. What remains is the target power, I think the bigger component, the remaining part of GTM space, we will be seeing that healthy inquiry, and we are already at a different stage of either documentation or negotiations. So that number should trend up overall.
In terms of how we posture, we are definitely posturing on a higher end. Even CapitaLand is to be looking at below or more, it's a single-digit number, right? Today, we are looking at a more double-digit rent ask for Cap Au. And for the rest of the year and looking to next year, I think the demand, my own prediction is, I think the demand will still be reasonably healthy. It's not a big name tech company, they want to recalibrate how they want to look at their space requirement given the macro outlook.
And of course, there are some disruptions in some sector of the new economy, and I know the things like the crypto market, I think is pretty weak. Unfortunately, we don't have that. But we also seeing overall, although may not impact us so much. Very, very strong family offices set up here, and this is reported widely, right, in different various media or the consulting report. Those will take up space.
So it's about getting the level where the vacancy is at a nice equilibrium. I think we -- then I think the rent mark-to-market range is probably sustained. Because I think the supply situation is very manageable. The big supply coming up -- as of is in the market now is naturally the bigger one is like local tower -- local midpoint tower. And the later on in 2024 or early 2025, they are looking at the One Central Boulevard. So these 2 are the more significant coming on the market, and it's already been reported in the market that's not transacted that's already happened.
So I think the big question mark is really how the big tech company are going to -- because they are the one that's been taking up a lot of space. Some banks are still looking at rightsizing the business generally, no different from pre-COVID. There are new demand coming in from various industries. Business support industries are also looking at Singapore as an interesting location. So I think there will be demand dynamics that would come with different pockets of times. This question sometimes to me, you may see some noises in the market in terms of vacancy and our transaction rate, right? That could be a function of when the demand really come in, at which point in time, when the supply and where the gray market surface, there will be some adjustment. There's still be corporate who are adjusting to a different model. And then we power demand supply can fulfill at a different point in time.
At the same time, we are also watching closely. I think at the moment, the healthy environment we earlier talked about in the co-working space, I think it should play well in place to this climate, given the uncertainty, so they will be underpinned. I think we are watching even in our own space. CapitaSpring, is probably, I think, mentioned before, is very well. We are starting to introduce the 6 [indiscernible] 2 to 3 core space coming out in the market. We're seeing some traction as well. So those will be the one that will be filling up space requirement for generally, I think, a smaller of the prior.
So we could potentially be family offices, it could be also potentially be a new setup, company new setup here, and it could be also potentially for temporary needs for companies who are adjusting their operational requirement as a result of the repositioning, how they want to put their resources. So I think that we find quite nicely.
Next we go back to Derek. I think we missed 2 of your questions.
Yes, I've 2 questions on interest rates. You put out that, since the impact on voting, but assuming you refinance your fixed rate loans at current rates, what is the DPU impact for 2023 or 2024?
I think the -- this question is, Derek, we can't give forecast, yes. So I think what we have said is, this REIT is based on it in today's market, this is what, this is the tower REIT that we expect to get have better go.
Okay. And on just the 4.5% interest rate, is that for 3 year? Or is it 5-year fixed?
It is longer than 5. And then the other question from Terence, on the percentage of debt in the other currency, we have about [ 10% ] in Aussie dollar, 11% in euro dollars. And the balance will be in Sing dollars.
Next, we have another question from Mervin.
Tony, just a question from clients have been asking me. In terms of NPL for the third quarter was $273 million. If you adjust for straight lining, what would the cash NPI be, in terms of year-on-year growth, in terms of cash NPI?
Can we come back on that?
Sure. No problem. First on Raffles City, I think repositioning, can you talk about the occupancy levels that you're seeing for the property rental reversions in asking rents. I don't know whether semi-luxury will do better, I don't know, but how are you seeing things for Raffles City?
I think overall, the positioning is as what we plan for. We wanted Encore Raffles City as a major center for the beauty-related trade, right? So the beauty class will be [indiscernible], so we executed that. So level one, I look at it, [Foreign Language] certainly interesting. So you'll be one-stop shop. This tends to be a high trading business, ticket-wise as well as margin. So those are the -- in our view, an area that we want to tap strongly, because no longer just cater for our local needs, I think you will cater to business travelers, tourists who we may reside around the city hall location. So I think we are angering that positioning.
Overall, based on the AI space that we have -- I think the demand has been healthy. Today, we are looking at about 70% of our space, already other operating or lock in or at different stages of documentation and negotiation. The latest that opened up is UNIQLO, I think is -- I don't know whether a chance to see why it's opened up really. But overall, I think the Raffles City is positioned such that we want to -- little bit on the consumer that has got a higher dollar value spend in terms of the pocket size, the ticket size.
On your question whether there will be a challenge. On the contrary, I think that's something we are rethinking about how your portfolio construct should look like. As you probably know, Singapore is moving higher and higher in the value-add chain. The consumer market generally would move up the value chain as well, given the kind of people that we are attracting here in Singapore. We only have one property, Raffles City that we can bang down on to make sure that we position it right. City Hall location is pretty good. It's an alternative orchard route. It's got a healthy cluster of hotel, they cater to their needs, whether people are traveling them for business, for the convention or tourist here because this is also a location, there's close proximity to Pacific streamer. So I think from a location perspective, we are pretty clear.
But we also know very well, we probably not be able to take on the lines of MDS where they are on ultra-lux rate, the super Tier 1 new brand. So we are not in that category. So we want to find a sweet spot. We hope that this is the sweet spot we can attend for Raffles City. Generally, Singapore is attracting a more affluent kind of travelers. Hopefully, this will be the mid, high end market that we are able to attract as a result, not just our own Singapore residents but also people are traveling here on future residents that may reside.
Just one final question for me. With the borrowing costs, new filings costs at 4.5%, there'll be likely negative carry for that debt for the office portfolio. How are we thinking about interest coverage ratios into next year? Is there any scenarios where by just below 2.5%?
Based on our simulation, I think the buffer is pretty high, in terms of the interest coverage ratio. So any stage now, we've seen we welcomed our margins.
Okay. So give some comfort. This is what I thought -- I think there will be other REITs who have bigger problems, I think.
I think we have done a fair bit of stress testing loan portfolio there. At this point in time, I think we are still okay.
Okay. Thanks very much. I think having demonstrated the portfolio resistance or the working on terms of hedging over the last 5, 7 years, it's starting to pay off. I think other people have been a bit more aggressive, will probably suffer going forward.
We'll just take one last question from the chat from Rachel. So she is asking if you can share any color on the occupancy and WeWork for '21 [ FC ]?
We already know what's reported, right? They actually reported very high 90s on the first phase that they launched in -- that was in August, right, in August. So I think that's a healthy start. I don't think we can comment on how their occupancy level is, but if you were to look at general direction, they certainly would -- a few uncertainties in the market. So I'm really confident that I think they'll be a subtraction yes.
Okay. Thank you, everyone. That's all the time we had. If you have any further questions, please feel free to reach out to the IR team. Otherwise, we hope you have a good week ahead. Thank you very much.
Thank you. Bye-bye.