CapitaLand Integrated Commercial Trust
SGX:C38U
Earnings Call Analysis
Q3-2023 Analysis
CapitaLand Integrated Commercial Trust
The company's occupancy cost is robust, sitting slightly higher quarter-on-quarter at 16.9%, up from 16.6%. With utility rates locked in at a lower rate for the second half of the year and expected to decrease average rates in 2024, there is an optimistic outlook for margin improvements. Additionally, tenant sales are seen as sustainable and critical to maintaining healthy margins.
There is an anticipation of $29.07 in financial metrics, which is expected to remain consistent into the latter half of the year. Mid-single-digit percentage expectations align with previous figures, indicating a controlled and predictable financial path moving forward.
The company is cautiously optimistic, factoring in a general economic uncertainty and potential impact from the Mainland Chinese market on local businesses. However, lowered core inflation in Singapore and muted rate impacts are considered positive signs. The business environment appears resilient with the potential for momentum in consumption if Mainland Chinese activity increases.
Rental reversions are looking good, with stable demand for office spaces and transactions. The company is riding on this stable outlook to uphold constructive portfolio management, despite slight headwinds from overseas numbers.
Certain properties in Germany may face valuation decreases due to tenant risks, while there's a cautious approach to Australia's North Sydney properties due to higher competition and occupancy pressures. The company is maintaining its leverage within a 40%-41% range, and is open to portfolio rationalization for financial flexibility.
The company is particular about its divestments and investments insisting they must be value accretive. This strategic approach ensures that portfolio adjustments are made with a consistent focus on increasing the company's value.
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Thank you for joining us in this briefing. We released our -- the third quarter business update this morning. I hope you had a chance to take a look at it. Before we jump into the second part, [ a bit ] brief on the agenda for today. We have our CEO, Tony, to share the third quarter [ update ]. Following that, we'll have our Q&A segment. [ At here ] today, we'll have the management team. In addition to Tony, we have our CFO, Wong Mei; Head of Investment, Jacqueline; Head of Portfolio Management, Lee Zhuan; Head of Investor Relations, Mei Peng. I'm Allison from the IR team, together with my teammates, Kevin and [indiscernible].Now, [ I'd like ] -- into the briefing, I'd like to invite the man of the hour to share the insights on the third quarter. Turning over to you.
Thank you, Allison. [Technical Difficulty] Good morning, everyone. Thanks for dialing in. We have released our third quarter results today, and I hope that you [ get ] a chance to read it. Before I start off, I talk a little bit of context with you sharing this number that we used for a [Technical Difficulty]. [Technical Difficulty], we know that very well. We have been writing little bit on the nice -- on the [ building ] impact [indiscernible] last year when the [indiscernible] [ 2023 ] varying the momentum in the first half. If you recall, I was a little more focused for second half this year, during the half, that we're seeing around the world the [ ban on ] certain in the same time.Third quarter cannot be slight better than we thought and what we stated, will help our ground strongly, operating at [indiscernible] from a – we're very resilient that our target [Technical Difficulty]. coming the second half, but we [indiscernible] the first half was slowly [indiscernible]. So with that [indiscernible] deals overall.But the day the second half [ started] [Technical Difficulty].Now [indiscernible] is sequentially on the quarter-to-quarter remained very resilient, especially from second quarter to third quarter. We [indiscernible] from a [indiscernible] performance [ had ] frankly, remains steady for the quarter in a higher base. Having said that, this nevertheless have little more more confident that [Technical Difficulty] quarter, another factor [indiscernible] what we fly back to the [indiscernible]. But [indiscernible] in sight, [indiscernible] very volatile, [indiscernible] will be a little bit more defensive.So [indiscernible] will be very proactive in our cost management, proactive in our risk management. And hopefully, we'll be able to [ give ] a reasonable outcome this year. And as I mentioned earlier, I think our operating metrics have been pretty stable. Portfolio frequency were not slightly slightly on that [indiscernible] in the first half in the quarter. [Technical Difficulty]Occupancy would be [indiscernible] definitely possible. Every [indiscernible] -- question [Technical Difficulty] getting back year-on-year against the high base. We achieved a 4% [indiscernible] improvement of Chinese [ Investment ]. [Technical Difficulty]And financial-wise, third quarter, or NPI level [indiscernible] 0.6% year-on-year, and in some cases, you can see a more or less across the border [ with ] fiber performance coming up on [indiscernible]. Yyear-to-date just right on to third quarter and the first half of the quarter.I think I mentioned earlier year-on-year is [ ready ] to work on that we reported. We expect the [indiscernible] improvement for the fourth quarter.On the balance sheet side, I think we remained very, very prudent. We began our leverage a little bit on the back of our distribution that was done in July, August, probably in August. We'll be back within our [ cash ] management that we have mentioned right from the beginning, [indiscernible], the mission that we will try to more or less [indiscernible]. [ So you try to avoid unnecessary draw downs ].So potentially, it was a [indiscernible] year [indiscernible] of the leverage. The other metrics, I think the one we watch out for is of course, the average occupancy. It [ dropped ] a little bit, 92.1% compared to the second quarter.[ That ] duration I think is not remember before [indiscernible] [ more in a ] small amount of gain, which we can [indiscernible] our [indiscernible] facility. [indiscernible] important [indiscernible] Majority of the debt maturity will come in the second half.. Coming to occupancy, I think overall as I just mentioned, If you compare to the first half [Technical Difficulty]. [indiscernible]T nothing to talk about the interest as expected, but are very proactive management, [indiscernible]our company is running [indiscernible] the business that we are impacting today [indiscernible] and hopefully, mostly in the fourth quarter [Technical Difficulty].[indiscernible] tended to say are we will continue to see -- no doubt there's a little bit better [ overcast ] in the market. We continue to obviously be able to [indiscernible] that will resulted in higher opportunity. Interestingly, I think we still have [indiscernible] market [indiscernible] decision-making, [indiscernible] a number of times in the [indiscernible].But nonetheless, we will improve and the [indiscernible] in our business [Technical Difficulty]. Rental relation has been very encouraging. It takes [Technical Difficulty] compared to the last [ year ]. We still continue to see a more robust midtown [indiscernible] capacity.But nevertheless, given the [indiscernible] of the uplift in some of them, [Technical Difficulty]. Recent specification of the [ group ], we [indiscernible] able to remain use the market [indiscernible], starting the name of the financials [indiscernible] and [indiscernible] is reflective of the [indiscernible] on the back of [indiscernible], let's say this year.We will continue to still make [indiscernible] concept to [indiscernible], hopefully that our [indiscernible] able to essentially[indiscernible]. [indiscernible] the trends is similar more [ in ] outlay [indiscernible] as well. It was in line with our [indiscernible] tenancy as an outcome there.Tenants [indiscernible] across the board, you can see that [indiscernible], not much in the first half. And increased [indiscernible] in terms of [indiscernible] any differentiators. For instance, they look at the overall commodity in a net decline.But it's been the decline comes largely comes from there [indiscernible], with [indiscernible] markets as we've been [ tracking ] [Technical Difficulty]We see more of that [indiscernible] hence [indiscernible]. The other -- on the other side of application, naturally most of the contribution coming from [Technical Difficulty].On the OpEx side, we're [indiscernible] in the timely[indiscernible], both the -- [indiscernible]. [Technical Difficulty] We continue to review that strategy -- find against this spot in terms of getting without building and the small [indiscernible] and related to property at a rate [indiscernible] market.Overall, the average rent of the [indiscernible] as a result of new business line. [indiscernible] [ And I wouldn't want to tell probably time this year ].On the outlook, I wouldn't want to dig down too much. You probably [indiscernible] many times. [indiscernible]. [Technical Difficulty] We certainly [ were doing everything for ] opportunities to bring [indiscernible]. When I look at the [Technical Difficulty] very, very [indiscernible]. [Technical Difficulty]With that, I think I'll probably end there and [indiscernible] go into the Q&A.
But before going to the Q&A, some housekeeping rules to note. [Operator Instructions] I can see Mervin as always the first one.
My first question is, wondering if you could give us a sense of what the occupancy cost --?
Mervin, I don't think we can't hear you.
Can you hear me now?
Okay. We can hear, Mervin.
I was just wondering whether you can give us a sense of what the occupancy cost is currently? Because, obviously, I don't know whether people are trading down and the tenant sales growth is starting to slow down to see -- give us some sense how hard you can push rents? My second question is, can you give us an idea of what is the electricity costs currently on a per kilowatt hour basis and whether that is expected to drop next year? The reason why I'm asking is it -- because the NPI margins seem to have dipped Q-on-Q. I'm wondering whether that's electricity costs related?
Occupancy cost is still pretty healthy quarter-on-quarter. We are about 16.9%, slightly higher from the first half, which is [ 16.6% ]. So I think we're seeing a healthy range. [Foreign Language] On the utility rates that we had locked in, I think I mentioned before, second half is lower than first half. And in fact, for 2024, on an average basis, you should expect it to be lower than the entire [ 2023 ] because of the high base -- the high rate in the first half of the 2023.So that's one factor. I think the margin is a combination of a few things. It is -- January, I think, of course, higher activity and a more high occupancy overall. We have, of course, manpower costs, that's gone out as well.I think the overall operating cost environment is elevated. But we have not fully factored in some of the savings, which we hope we'll be able to see as a result of our restructured PMA.That should come in gradually as we run the operations. So there's a little bit of minor movement in terms of OpEx here and there. It's not 100% attributable to the adjusted utility rates, yes.
Then, the electricity costs, how many cents per kilo hour will you be getting 2024? Is it in the mid-20s, or what number would it be?
We're looking at about doing $29.07, yes.
And the second half was I presume mid-30s?
Second half [indiscernible] [ same ].
$29.07 also second half?
Yes, same.
[indiscernible], please unmute yourself.
Maybe just first question for me, in terms of outlook on your reversions, both for retail and office. I think I mean you spoke that occupancy cost is still very healthy. So is there any chance out into 2024 -- we're still looking -- what kind of reversions are we looking at? That's my first question.
Yes, I think we're still keeping a -- potentially a single mid-digit reversion. We are working towards that. If you compare our occupancy cost now back to pre-COVID day, I mean to [ say earlier ], generally, I think we're still in a fairly comfortable position so long as I think we don't see a significant decline in tenant sales. So that would be a major effect.As of now, we hope things [ to be ] right through. The general economic outlook is a little bit cloudy. Hopefully, you see some green shoot. And naturally, I think that people are looking towards this part of the world and whether there will be real bottoming up of the impact from China, that is a big overhang now from most businesses in this part of the world.Already we see some Chinese -- Mainland Chinese are coming back to Singapore gradually. We are hopeful. I think that would be a good base that would give some momentum in terms of consumption.I think overall, the environment from a local business perspective, it still looks pretty healthy. Business [ lies ] on the ground. I think January across the -- most of your [indiscernible] plan. Most companies would be planning ahead, depends on the outcome of the most renewed contract that we are seeing now.But otherwise, many expect that may not have a significant spillover effect. Hopefully, that's true. And then the business environment can resume in a more cautious -- a lot more optimistically, yes. At the moment, I think the interest on the entire business environment -- and of course, that will translate to whether the consumers still feel good.I think one quick takeaway, we see healthy -- at least in the domestic perspective is that we are seeing a declining core inflation. I think which is why you look at the overall rate impact vis-a-vis what I see in the major economy like the U.S. The reaction of the rates in Singapore has been a little bit more muted now, yes. So that's, I think, one positive takeaway.But we think -- we are a little bit cautiously optimistic in the sense -- hopefully, consumer with a few likewise going to 2024, yes.
How about office? Is this still a straight mid-single-digit positive?
Yes. I think we're still looking at a mid-single-digit expectation. Coming from -- if you look at our expiry profile, no doubt, if you read some of the report some consultants are putting a bit of caution in terms of outlook. We look at it, and we naturally compare that against our own portfolio. The outgoing rent this year is not very demanding. I think it is a rent level that hopefully can be supportable with a single-digit kind of reversion.
My second…
Well, maybe I get Lee Yi Zhuan to give you some flavor.
[Technical Difficulty] I think we are looking against our outlook expiry numbers. I think largely what we are seeing in the expiry rents for next year, a lot of them are kind of below the market rent of around [ 11 ], [ 85 ] business in [ ERE ] number. So I think that gives us a little bit of tougher end support when it comes to renewals, which is something that company -- one of the key strategies in terms of depending on occupancy. Of course, I think right now what we also see is the [Technical Difficulty].There will be a little bit of a slight back [indiscernible]. We're making a bit of [Technical Difficulty]. But now I'm more understanding, we don't think ROI is also -- it's actually holding out their rents. So I think it's generally okay.We have also seen kind of scheduled space encouragingly this quarter. The shadow space available in the market actually came down quite a fair bit and we will monitor this. But I think it helps to further support that, even though we think rent will be a little bit pressured in these few quarters, right, it should still hold out in the longer run.
Increasingly you'll see more tenant would probably be a bit more careful about doing a movement. I mean, given an outlook that's still up in the air, it's already [ reflected ] in our own performance. We see more and more tenants [ who ] want to stay. Similarly, I think [indiscernible] we try to strike a deal that is profitable for both sides. I think that's probably -- you're going to see that play out in the market in the next 12 months.
My next question is really on asset valuations. What are your thoughts? Have you changed since we spoke in second quarter? And given gearing is quite close to the 41% mark, at what levels of your gearing post the asset valuations reviewing year-end? Would you then take an action to bring down your gearing?
I think our -- no different from the one asset in the first half. Generally, I think Singapore valuation is not demanding. In fact, our peers reported, right, for the retail space, and the valuation has been pretty okay on the back of a higher reversion number. We are seeing that -- we expect a similar effect, at least for the retail side. Office side -- in fact, office side, we also don't think there will be a significant movement. Generally, there's not been a lot of transactions in the market and most of the office landlords that reported results ahead of us.We already gave you some clue, right. Overall, I think office demand looks pretty healthy at the moment still. And just like them, we are [ taking ] a nice, healthy rental reversion. So I would imagine overall Singapore portfolio will be fairly constructive.We'll see headwinds overseas numbers slightly. Last year, we've taken down some assets overseas in Germany, particularly Galileo, because it's a little bit more risk, right, because of an outgoing tenant with no clear potential infilling, refilling up and potential downtime.So there has been a bit of taken off the effect towards the end of the year. We'll see how the number pans out. We expect cap rate may expand for Germany, likewise for Australia. So that may translate into a valuation impact on the downside.Overall, as a portfolio, we may be able to retain in where we are [indiscernible] to with plus/minus here and there. But I think there will be some offsetting effects on the -- offsetting numbers in Singapore.
Just second part of the question. Any thoughts of when you would take some action, now that you're pretty close to 41%?
I think its 40%-41% is -- it's not ideal. It's a level -- if you track our numbers, it's been tracking around 40%, 41% there [indiscernible]. It fluctuated because, on the one hand, you have distribution. On the other hand, you also have receipt and the recession healthy. So we are trying to make [ that sure ] carefully to keep it within the 40%, 41% range. Valuation remains really stable as where it is. Then you would likely see in the kind of range, right? We know that we'll be still looking for cautiously to look at any enhancement to plant other avenues of revenue growth.They will continue to do that. Usually, it's back with a healthy ROI expectation. So it'll also be potentially valuation supportive. So I think those are the things that we can do to help to maintain a fairly stable kind of bearing outcome.But of course having said that, it certainly doesn't give us a lot of financial flexibility, having a 40%-41% rate level at -- current interest rate level. At an appropriate time, we may look at some portfolio rationalization, and then hopefully, there could be one area to give us a little bit more financial flexibility.If you look at any kind of avenues to turn -- improve our revenue outlook as well.
Next, Vijay, please go ahead.
Just a follow-up on the earlier questions. Did you try putting any of your assets in the market at this point of time for potential divestment? Or is there any reverse inquiries for your assets which you considered? And what kind of demand is that out in the market at this point of time?
Yes. We do -- we have not -- [indiscernible] our assets out in the market. But we certainly have dialogue with some big parties who have interest and naturally that we may not lead to anything. But we're certainly open to discussion and see where we land. There are interests coming from different buying sector. Some of you, you probably know there are some family offices who are looking to get into this space, so those one potential pool of potential buyers. Family office is one. Even in individual high net worth, their ticket sizes may vary.So again, those are dialogues that we shared in the market and also some trust we get it from our -- the agent that speak to us as well. So I think it's a bit diverse. But it's not as wide as it used to be. Unlike in the past you get a fair bit of private equity firms who are looking to deploy.Today, I would say we're still slightly more in [indiscernible] [ characterizes ] improving in terms of buyer seller expectation, sentiment. We have seen some transaction out there. Ticket size seems to be also getting bigger since our [ end block ] transaction that's gone through.So I think the market is slowly working its way through in terms of where it would be a transactable price. So this is what we observe in the market.Jacqueline maybe you want to add any color? And maybe my colleague can give you a little bit more color. [indiscernible] There's activity in the marketing, yes.
So I think like as Tony said, I think we are seeing a bit more pickup in investment activity in the last couple of months compared to, say, 6 months ago. So especially in [ we think of ] cost [Technical Difficulty] in terms of our even received inquiries, and let me share each [Technical Difficulty] either divestment taking [ out there ]. So we are constantly evaluated progress, in the past few months.
Sorry, there's a lot of echo.
Sorry, there was a bit of echo in the last few sentences..
So investment activity has had picked up in the last 12 months. And as far as ] our portfolio ] is concerned, yes, we do receive inquiries there and we will obviously evaluate each plan and [Technical Difficulty] So whether it's a divestment, AEI, redevelopment, et cetera.
Would I be right in saying that the baseline would be at least at valuation or above valuation? You are not considering any divestments at discount, even if it is a noncore assets?
Whatever divestment, if any, it will have to be value accretive as -- So we want to make sure that's the best value.
My second question is in terms of the work leases. Has there been any negotiations or conversations going on in terms of what it is? And are they paying up on time so far at this point of time? And what sort of rent deposits do you have for these leases?
Yes, we are seeing dialogue. We will, at this moment. So we can't dive out much. Certainly, that's the out tenant, and they're still paying rent, yes. So that's all I think we can say here.
So can I just confirm, I mean the range were around $7 per square foot when they were signed. Was that -- Am I right in saying that?
We don't share our -- [indiscernible] confidential, we can't share our -- the commercial [ tariff of our ] tenants.
[indiscernible] please go ahead.
Could you share if there's any more color on CapEx?
We are still in discussion, in fact, in the detailed discussion with the prospects. In fact, all -- into the technical details, what aspects required because these are the necessary information that has to go into any kind of lease agreement. So where we are now, we are at a very late stage discussion on those technical specs. Those specs will have implication on the CapEx that may be required. Some are based -- some may have relevance to the base building effect. Some will have a spillover into area that tenant may be required to put up place.So I think those are technical details that are still working out on the ground in the moment. We certainly will share when we have something that comes to a finalization.But at the time, we still expect the same downtime, 18 months or so.
And given gearing, is it fair to assume that acquisition is off the table until we see some divestment, if any?
So let me put this way. In today's climate, we tend to be a little bit more defensive, which I have elaborated earlier, right? Defensive doesn't mean that we don't look at opportunity. It has to be a holistic one. But naturally, the first thing we look at is whether the asset makes sense. And then we start thinking about how best we can fund it. They could involve various options which we have done before, whether we should recycle some capital, is [ other ] combination also.So I think those are the things that we cannot cut off our radar. But from a cost string perspective, I mean, a lot of things have to come in alignment. The market would be there. There must be a funding market available, potential available to monetize the assets.I think all has to come to the fruition, yes. We potentially may not get everything aligned on straight line. But if majority of those conditions are in place, then we can really thought about account inorganic transaction.Otherwise, we would be fairly defensive, trying to make sure that our assets work hard. We can also start exploring. Hopefully, the cost structure will come off, whether it makes sense to redevelop certain assets, which we have done before and get into some kind of a detailed analysis and study into various assets. So those are fine [ parts ] of our portfolio construction, yes.
And in terms of opportunities, right, is there -- do you see more within the sponsor or third-party?
In fact, both sponsors don't have a lot [indiscernible]. Actually, I think if you look at flows, you probably see more third-parties. And you may be aware there are some third-party deals out there. They could also be competing if there's a buy we're interested to look at our assets. They may be also represented through those potential buyers. But certainly, we look at the assets, it does make sense, we give it a miss. So we walk away a couple of years before.
[Operator Instructions] Yes, Brandon, please go ahead.
I just have one question on the patent sales trends. Can you review to us the third quarter growth?
Tenants just of the quarter?
Yes, just the quarter, because the number is above 9 months.
Year-on-year is quite flat actually. Year-on-year its quite flat. But I mentioned earliear at the beginning, sequentially, second quarter actually that we are seeing some growth and third quarter was high base.
I mean, the reason I'm asking is, I think going into year-end and going into next year, looking at the trend in the past 2 quarters, are you concerned that sales could be sort of slowing down?
Fourth quarter will be particular -- I think fourth quarter is usually the period where you see a lot more activity coming to school holiday. So next week, right, I think when all the exams are over, when the kids are back, you see -- you tend to see more crowd back to the mall. As far as where -- I think the business convention are still active. October, November should be reasonably okay. December, you may see a little bit of a slowdown as people -- a company wind down into Christmas. But then you have the festive sales that may give a boost.My reading is that it will be potentially a little bit more muted. Hopefully, we're going to shift a flat year-on-year compared to last year having a pretty high base last year. Given what we are seeing now from an economic front, there's still a big question mark about how things will pan out in the next 12 months.It may translate into a little bit more cautiousness in terms of discretionary spend. But we do expect the basic -- those necessity spending is to be fairly resilient, yes.And the other point that, to some extent, would have impact naturally would be the inflation number. Hopefully that trend continue. The core -- of course, [ headline ] has gone on a bit 5%, but this then [indiscernible] let out.The core CPI seems to be trading downward, which means that there's probably be less especially from the Central Bank to be even tighter in terms of their rate control. That may translate into a potential, weaker thing vis-a-vis other currency because it's all the trade basket, right. Probably not the Central Bank, the way they manage the currency and -- inflation is through the currency system.Hopefully, that would result in bill, a positive uptick in terms of domestic spend. The irony in Singapore is that a strong Sing dollar would have a higher tenancy to lead into a more leakage -- no sales leakage outward. With a [indiscernible] of travel being less -- at least is just sound that the spend may not be as high.So a slightly weaker Sing dollar may not be all too bad for the tenant sales in Singapore.
Next, Derek?
I just wanted to follow up on the occupancy cost that you mentioned at 16.9%. What would it be like for Suburb versus downtown?
Suburb is about 15-plus percent, downtown is about 18% -- 18-plus percent.
And in terms of the trend, is it trending up for suburb and downtown?
For year-on-year, in fact, downtown is lower -- sub is lower, so compared to last year, right? Last year, we were in the mid-17% range as a portfolio. The suburban is more like 16%-ish and downtown about 19-plus percent. So as far I mentioned from the onset, I think overall, we're still in a relatively okay position from a tenant occupancy cost point of view. But naturally, I think we hope the sales will be able to sustain.
And for reversions, what would be your outlook like for suburb and downtown?
We did not split that so clearly between suburb downtown from a reversion expectation. What we managed -- rather we manage it as a portfolio, which I alluded to earlier. We try to manage it within a plus single-digit -- mid-single-digit kind of level, yes, next year.
But just maybe more broadly, would you expect downtown to outperform suburban next year in terms of rent reversions?
If we continue to get the current momentum -- we've seen a little bit of a slow over inbound traffic from September-October and also August-September, right? In fact, the costs were slightly lower than the previous quarter, but higher -- naturally higher than year-on-year. If that trend continues, naturally, downtown will benefit more than suburban and that may translate into a better confidence level in downtown. And hence, the rental expectation may go up yes.I think our trending is not very different from what URAs reported in their overall index, right? It seems to suggest the onshore belt, the downtown location, the rents are moving faster.
And just on -- I think last quarter, you mentioned you were in talks with a large tenant -- negotiations with a large tenant potentially there. Is that still on track? Or has anything changed?
Yes, we're still talking, as I mentioned, maybe didn't hear me, that I'm still talking to the tenant. We are drilling down to the technical specs that will be -- I mean, these are important things that we need to know now before we get signed the agreement, yes.
I think you shared earlier. And just, lastly on all-in interest -- on the interest rate. You did mention that the bulk of mix expires in the second half. But just wondering if you could share any color on the interest rate outlook for next year?
I think we have no crystal ball. We can only manage within -- but maybe we can give you some kind outlook next year.
I will say that we don't expect to see that kind of magnitude of increase year-on-year versus last year. So yes, we think that in terms of the financing costs, in terms of credit margin, it would be still very competitive given what we've been seeing. Yes. And in terms of liquidity, I don't think we are seeing any difference. It's still very -- we still remain accessible to [ lot of ] -- the financing options, whether it's bond market or loan market, yes.So if you're asking me to guide in terms of where our average cost of debt would be next year, it would probably be in the range of [ 3.5% ] to high 3s.
Just a question on inventory reversions again. I have a look at the historical occupancy cost pre-COVID, was between 18% to 19%. Given labor cost pressures, is it possible for you to push it to 18%,19% or will it be slightly lower than that going forward, assuming tenant sales [ curve ] already they are?
I think tenant sales is critical. So tenant sales is the -- I mean, something on a larger base that will impact because that's going straight into the tenants operating margin, right. We think it's sustainable and at this level. Whether it should move up to 18%, 19%, yet to be tested. We certainly hope the inflation number would taper down. That's the real test, right? [ Reversion ] number taper down. I think it will have some potential impact on their operating margin.And hence, whether the retailer -- I mean, every retailer -- different retailer in their different sectors will face different kind of cost pressure, would have a different way to react.I think I alluded before. My own assessment is that with an inflation number hopefully not moving any further and just coming -- stay where it is, chances are you see some margin expansion for the retailer, because unlike you see price will come down.I mean, that's how the retail market will tend to be quite sticky on the price when it comes to adjusting price downward that [Technical Difficulty]. But [Technical Difficulty] so I mean that's the behavior of the [Technical Difficulty]. So I think that if we can contain the overall cost structure in Singapore, potentially, you can see retailers [ enjoying ] to be a better margin going next year.So that will give us some flavor whether lower CRR is sustainable, okay, and have some more room to go on.
Yes. Just a question, Australian office occupancy, it dipped Q-on-Q. I noticed based on your appendix the occupancy levels that [ now something ] closer to 1%. Can you hold occupancy at these levels? Or do you think it may drop further from here?
I think there will be some potential friction movement within each building. We would have tenants that would want to move on to other buildings. But at the same time, we also will be discussing different prospects, new prospects. Whether we can sign the in time, there could be a different timing. But overall, certainly in Australia, particularly in North Sydney where there are new supply [ decommission ], there will be quite strong competition that we have to face now. Maybe Lee Zhuan, you want to give -- anything you want to give…?
[indiscernible] So for Australia, I think that the North Sydney properties are probably a little bit more under pressure in terms of occupancy. I think it's -- one of our tenants is actually known to be moving on to another property. But I think the team is actually actively talking -- in talks with some potential replacements that can actually [ travel ] up quite a fair bit of that space. So it's just a matter of when we actually manage together commitment versus the expiry -- natural expiry, and so some of these committed numbers in occupancy might see some fluctuation in the interim.But I think -- directionally, I think nothing much normally to be concerned about at this point because it's just common trends that we see. In terms of incentives in the market, I think we also see the North Sydney side because of the higher competition amongst the properties in the North Sydney.We do expect maybe next year some of the incentives number and as well as the -- what periods to probably take a little bit longer. But I think right now, we will have to work quite hard on the Australia assets for the North Sydney part.As for [indiscernible], those that is -- on the Sydney south things, I think things are actually a lot more stable.
So just wanted to turn it, after this tenant has leaving, when are they expected to leave and what percentage do they represent?
Can you repeat the question?
For -- the tenant is expected to leave under [indiscernible]. When are they expected to leave or vacate? And what percentage of the building do they represent?
So it's about 15%. I think right now, it's over [indiscernible] loss and we kind of talk with replacements for around 2,000 of those. But they are expected to leave end of November. But of course, we are in in talks to something, because some of the issues we are resolving with the tenant ongoing.There's a little bit more time to fill it up. Of course, the one the up going tenant in November that we find alluded to, [indiscernible] space we are currently in talk with -- potential will take it up.They are one to two spaces out in the market now. But at the same part, we are also in talk with other -- new tenants in other floors, whether we can close the deal. Hopefully, there will be competition in the market as you probably can know that each one has [ social ] eluded.It's a question whether we want to seal the deal and right through this period of time, or wait for a better time and keep it vacate? I mean this is a judgment call, yes. But certainly tactically, we're doing a lot of things to the assets. There's a general common preference now for many occupiers, whether it's North Sydney or Sydney, and we are seeing it in ourselves.They want to be in the fitter space. It's also a reflection of, I don't know, tenant not willing to spend the CapEx, right? So if you look at landlords to do the job. And then there's more flexibility when it comes to moving in at own timing.So we are trying to catch that window for the different buildings that we have, not just [indiscernible], but as well as the other 2 buildings.
[indiscernible] We can take one last question. Su Tye, would you like to go?
Yes. Maybe just 2 questions. First of all, just when we look at the Raffles City AEI completion, overall, the tenant mix has been pretty successful. But would you say -- at this point in time, what's your view? Is it like has it been better than the performance? Because so far, the overall shopper traffic, in my view, still hasn't moved up accordingly to what you expect post-AEI shopper traffic to be.Maybe it's because of the third quarter we have like a lot of [indiscernible] closures and all of that nonsense. But perhaps, going forward, you think it's reaching what you expect to be the returns that you expected? That's the first question.Second one is that, overall in the next 12 months, maybe even slightly later than that, aside from rental growth in the Singapore portfolio, what will be the -- sort of the levers that you think can generate the better returns? Is this going to be divestments or acquisitions based on what you see on your portfolio?
So I think Raffles City is panning out, mostly what we hope to achieve in terms of repositioning. And in fact, we get quite good traction from return to normal. We are not back to pre-COVID, that's for sure, right? Because overall, I mean, generally, most of the property footfall has not gone back to pre-COVID. Variety of reasons, work from home in downtown is a little bit more different kind of landscape.And I mean tourist visitorship is -- we are not back to pre-COVID. So that's already one I mentioned. But in terms of the trading performance actually, it has gone through a significant uplift.So Raffle City, I think we have brought in and is in line with our positioning, right, to move the Raffle City 1,2 notch higher than it was used to be. And that [ Robinsons ] space has been -- in fact, give us the question if you do that.You have probably witnessed the way you're done at the level 1 related before. We want to be the key location for the Beauty, Health -- basically, the beauty cosmetic, essentially tapping on that space and anchored Raffle City as the location for any shoppers who want to look at the core product.And we brought in a lot of variety of offering at a mid-higher level. So that's sort of set a base because the kind of traffic that will draw in would be different from the -- what you used to see in [ Robinson ], where Robinson is around, so that's one.Second, while we do the physical work and then fill up the space that has been affected by the AEI, the entire position of Raffles City entails more than that. And that includes area that's outside of AEI. And we are progressively making that trade and brand remake.And you probably have seen some of the new brands that we brought in. The more recent ones is [indiscernible] took up space that used to be occupied by coach. And that location -- besides that, a few other key brand drivers that will be critically important to recoup the brand mix one in Raffles City.So the fiscal what we are doing most of the repositioning part we are not -- we are probably about 50% there. So you expect to see in the next 12 to 24 months, more in a way a real renewal of some of the brands in Raffles City.In terms of how we want to -- I think some part I talked about it earlier, we will be a bit more defensive, right? I think defense doesn't mean that we are not investing. We're investing carefully. We're investing into areas that will help us to plan new avenue growth. And that's a continuous effect that we have to just find our own asset.And we've done that. We've done that with Raffles City in the last year. We've done that at [indiscernible] property in a large scale. And we'll continue to do that whether it is large or small. We look at individual assets, whether we should do it now, whether there will be low-hanging fruit that we can take.And those involve investment that would plan to seek for income stream going forward. So I think that's going to be another driver that we're looking at.Cost management is critically important. I mean we are also looking at holistically, are there further cost driver that will be helpful in a meaningful way. We're starting different things at the moment on a portfolio-wide. We kind of [ diverge ] now.What we have executed in this year was to restructure the property management agreement when it became due, right, to make it more matching to the top line. So the leasing part -- the leasing costs used to be all undertaken by -- leasing cost is in manpower cost that goes into listing the office and tenant.I mean the costs are actually paid by the REIT. Now we have restructured that way so that the cost only comes in when the deal is closed. So it's more commission based. So I think there's a bit more matching on the top line and bottom line. So we try to manage cost, that way that was a major change this year.The other one that I talk about may involve a little bit more longer term change where the impact could potentially shift the amount of CapEx that we need to put in to maintain the building in tip-top condition. So those are the things we are watching on.
Thank you for your questions. That is a time we have this morning since. Serious apologies for the technical disruption. If you have further questions, please direct them to ask our team. And please do send us your report when published. Thank you and have a good rest of day.
Bye bye.