Stoneweg Europe Stapled Trust (SET) Earnings Call Transcript

Good morning, and welcome to the Cromwell European REIT's First Half 2023 Results Briefing. We will begin with a presentation by the Cromwell European REIT management team, followed by Q&A. [Operator Instructions] Now I'll hand across to the CEO of the manager of the Cromwell European REIT, Simon Garing. Simon, over to you.

Thanks, Kara, and good morning to everyone, and thank you for joining us today. By way of introduction, Cromwell European REIT or CEREIT as we will refer, owns EUR 2.4 billion or almost 2 million square meters of European commercial real estate managed by over 200 Cromwell staff located in 14 cities across 10 countries. Today, we are pleased to report that CEREIT has effectively reached the important milestone of being 51% or majority weighted to logistics and light industrial post the pending sale of Bari Europa. We will continue to drive this portfolio weighting higher. Turning to the next slide. The macroeconomic conditions in the first half have been challenging with headwinds on many fronts. So this slide provides a good illustration of how we see CEREIT's midyear scorecard and demonstrates our ability to effectively mitigate the challenging period. Firstly, cap rate expansion has put pressure on asset valuations, but our portfolio has been resilient with a modest decline to latest valuation supported by higher rent growth in leasing success. Secondly, the ECB lifted interest rates in July for a ninth time in a row to 3.75% with perhaps one or two more increases to go. Although we are not immune to higher interest rates, we were able to effectively mitigate this through a high level of fixed hedge debt, while recent margins on our new debt aren't too much higher than previous facility costs. Thirdly, Eurozone headline inflation has been trending down from its peak in October last year, but core inflation continues to persist as most of our rents that are indexed to inflation, this has benefited CEREIT through higher net property income with first half '23 rent reversion up 5.9%. And lastly, secular trends coupled with weak economic growth momentum continued to affect office space demand. Therefore, the pivot to majority towards logistics has mostly insulated CEREIT's portfolio income and valuation. Slide 5 provides a snapshot of the first half performance, which we discussed in detail later on. There are two overarching points for investors to take confidence in from these results. Firstly, the balance sheet is in very good shape. We were able to sell EUR 135 million worth of assets at a 5.4% premium to valuation and net gearing below 40%. NAV is still a very high EUR 2.30 per unit compared to CEREIT's unit price on the SGX of EUR 1.55. With our recent refinancing, we have EUR 500 million of ample headroom now to MAS and loan covenants of 50%. We have no debt facilities expiring until November 2025. Secondly, the DPU is still very resilient. Overall occupancy is maintained above 95% with like-for-like industrial NPI growth of 8.7%, with almost enough income growth to offset the rise in interest costs. Our DPU that we announced today of EUR 7.79 per unit, annualizes to a 10% yield at today's unit price, well above the sector average. So why has our valuation only moderately declined 1.6% in the half or 3.2% over the past 12 months since the cycle turn? Well, this chart shows that the portfolio is relatively high initial yield of 5.9% has provided that conservative cushion to the rise in European interest rates. A result of our acquisition strategy aimed more at the small to midsized core plus and value-add assets rather than the generally larger and lower-yielding prime assets most impacted from the recent rise in interest rates. So notwithstanding that our valuation cap rates have moved 74 basis points higher, that's less than prime yields reported by Savills, but the higher rent growth and strong leasing results have mostly offset this headwind. European real estate investment markets were extremely quiet in the first half with European commercial property acquisitions falling to the lowest level since 2010 in the second quarter, as you can see on this right-hand column chart. Inactivity was spread fairly evenly across Europe with all major markets and sectors reporting major decreases from the average. Private investors are buying in this market and tend to be in the EUR 20 million to EUR 50 million lot sizes, again, mostly where our portfolio was situated. Governments are also using this opportunity to buy strategic assets back, again, supporting CEREIT's process. The rate of decline in prime and green office yields have started to slow down as we get further into the rate cycle with less than 20 basis point cap rate reduction in the second quarter. Savills are forecasting around only 10 basis points more to rise in prime green office yields while secondary office yields may move by up to 50 basis points, reflecting the softer occupying markets. Logistics prime yields are expected to move only another 20 basis points on average across Europe. So these market conditions provide the context to my next slide, where we continue to execute our investment strategy heading towards that majority weighting to light industrial and logistics. As I mentioned previously, over the last year or so, CEREIT has sold six assets across four countries, amounting to EUR 135 million at that blended 5.4% premium to the most recent valuation. And most recently, Piazza Affari, which was our Grade A office asset in Milan, was divested for a healthy EUR 93.6 million at a EUR 12 million or 15% premium to the purchase price and EUR 200,000 above the recent June valuation and on the yield around 3%. We're on track to divest EUR 200 million this year out of the EUR 400 million divestment program that we announced last year as our strategy over the next 2 to 3 years. While it's taking longer for buyers now to secure finance generally across Europe, the Ukraine war is limiting the foreign buyers engaging our Finnish and Polish sales process with thus less pressure on the domestic buyers to close on these assets more quickly. The Bari Europa tax police asset sale process is coming along well with most of the major CPs now reached, and we plan to close this sale by the end of the year. CEREIT's resilience of income is underpinned by our tenant roster with close to 850 tenants to mostly government, MNCs and larger blue chip companies across more than 1,000 leases. So there is plenty of diversification and high credit quality in our tenant roster. Our top 10 tenants now account for only 28% of the portfolio's total headline rent. So while no one customer tenant industry segment accounts for more than 16% of the portfolio, this is a very important metric, particularly for our bond investors. CEREIT is now one of only three Singapore REITs with the leader MSCI ESG AA rating. It also recently advanced one spot to claim the #7 place amongst the prestigious NUS Business School, Singapore Governance Index, retaining its place in the top 10 for the fourth year and achieving the second highest base score, again, reflecting Cromwell's culture -- governance culture. We just completed CEREIT's fifth [indiscernible] submission, and I'm pleased to share some of the ESG highlights from the 2022 environmental performance on this slide. With the introduction of the PropTech [ deep ] key across the portfolio, we are more efficient in data collection and analysis. So we're already well prepared for the introduction of ISSB, which is the new ESG code under IFRS and are moving to reporting under [indiscernible] in Europe's very stringent SFTR framework. So with that, I'll hand over to Shane to run through the financial performance and capital management. Thanks, Shane.

Thanks, Simon. So first half net property income was $68.5 million. This was up by 1.8% compared to the prior corresponding period or PCP. And this was mainly due to higher rental income from inflation indexation and acquisitions, which were completed during FY '22, only partially offset by more recent asset sales of EUR 135 million. Total interest costs increased by 50%, which was mostly offset by the NPI gain. The increase in interest costs was largely due to the 3-month Euribor, which in 1 year has moved from 0 to close to 4% today as well as a smaller impact coming from refinancing at higher margins from the old facilities. The hedge rate through most of the period was 75% before we lifted to 94% when the rates hit 3%. First half '23 adjusted DPU of EUR 7.79 was moderately down 4.5%, excluding income recorded in the first half of '22 from the two Italian assets that are now under development. The Board has decided to preserve capital gains and not provide for a distribution top-up in the first half to offset the lost income from those developments, given the weaker macro fundamentals and tighter credit markets. So the actual DPU was down 10.4% due to this more conservative payout decision. This next chart shows the positive impact from the pivot to logistics, and that -- the benefit that's had on NPI, with the sector's contribution increasing to almost half of the portfolio NPI, up from 34%, 2 years ago. Notably, though, the office sector did show a better performance, both quarter-on-quarter and half-on-half. In the first half, the office sector NPI was 1.2% higher than the PCP on a like-for-like basis. And this excludes Nervesa and Maxima. A slight increase in vacancy in the office sector was more than offset by rental growth from indexation. Now turning to the waterfall chart. So this is really an effective way to show the major drivers of the difference in DPU in this half year compared to the PCP. As I mentioned, the stronger NPI growth offset close to 80% of the interest cost increase. The third factor to note was the EUR 0.005 impact worth approximately EUR 3 million of 6 monthly income previously earned from Nervesa and Maximum assets being under development now. And Nervesa is expected to be income producing in the first half of '24. While divestments didn't have a material impact in the first half, the sale of Piazza Affari occurred in the end of June and will have around a EUR 1.5 million impact on NPI in the second half. However, the RCF was repaid with the proceeds of the sale. Therefore, we wouldn't expect much impact on the bottom line. It was pleasing to note that operating costs were well contained in the first half of this year at EUR 31 million in total compared to EUR 31.2 million in the PCP. Offsetting service charge income, the net nonrecoverable operating expenses was EUR 11.9 million in the first half, and this was only 5% higher, which is considered a pretty good result in such a high inflation environment and underline the good work of the asset management teams. On to the balance sheet, quite a lot to talk about on the balance sheet this time. As at 30th of June, CEREIT had EUR 140 million of cash with EUR 94 million of that coming from the sale of Piazza Affari, which occurred at the end of June. This cash was used to pay down the RCF in July. Next to note is the contracted sale of Bari Europa, which was announced in early June. This sale still has some conditions precedent, so we do not expect completion of this until fourth quarter of this year at the earliest. But we are holding this as an asset at its sale price above the latest valuation as an asset held for sale. You will note that we continue to highlight, there is a contingent liability from the original acquisitions of these Italian assets, which we are still negotiating with the previous owners. NAV was EUR 2.30 per unit following a modest fair value decline in investment property valuations in June and from the debt-funded development CapEx, not fully captured in the valuations. So we are pleased to announce two recent refinancings. Firstly, our new 5-year sustainability linked revolving credit facility for an aggregate amount of EUR 165 million. The signing of this RCF follows the recent full repayment of the old facility. And secondly, a new 4-year sustainability linked loan facility of EUR 157.5 million to refinance the last of the FY '24 debt expiries, leaving CEREIT with no debt expiring until November 2025. Weighted average debt maturity stood at 2.5 years at the 30th of June, although this would increase to close to 3 years on the basis of the new facilities signed being fully drawn. Margins were around 50 to 70 basis points higher than previous facilities, reflecting the tighter credit conditions. However, we are pleased that all traditional bank lenders for these facilities have renewed their lending to CEREIT. While CEREIT's aggregate leverage ratio recorded was on a headline basis was 41.5% as at the 30th of June, this reduced in July to 39.5% following the Piazza Affari sale. The current leverage is well inside the loan covenants and MAS limits, while we continue to operate inside the Board policy of 35% to 40%. And we are in advanced negotiation for the sale of selected nonstrategic assets, which will continue to be used for liability management and to offset any further decline in valuations. We remain committed to maintaining CEREIT's investment-grade rating of BBB- with stable outlook. The all-in interest rate in the first half was higher at 2.85% compared to 2.38% at 31 December. And if we were to draw down fully on the new RCF, the effective rate would be closer to 3.3%. And as a sensitivity, 100 basis point increase in the 3-month Euribor would increase the all-in interest rate to around 3.4%, and the impact on full year DPU would be about EUR 0.38 per unit, around 2% impact, assuming the refinancing is in place and the RCF was fully drawn. If the RCF is undrawn, then the impact would be only 0.6% or EUR 0.09 per unit. Now turning to Asset Management. On Slide 20, you can see the chart on the right-hand side that shows the portfolio weighting by country to really keep in perspective the occupancy by country on the left-hand side. The Netherlands, Italy, France and Germany account for 75% of the portfolio, and these are all above 94% occupancy. Finland and Poland office show a weaker performance, which is explained by the secondary locations and grades of these assets. And we have already initiated sales programs for some of these assets, which only makes up 12% of the portfolio. In the second quarter, tenant retention was high at 67%, taking the half year retention to 74%. WALE for the overall portfolio remains above 4.4 years, while a little shorter at 3.4 years due to the break options with the Italian government and the typical French leases in particular. The next slide reflects CEREIT's portfolio occupancy, which remains close to 95.4%, slightly down from the previous quarter, but underpinned by 128,000 square meters of leasing in the first half of this year. So rent reversion was 5.9% with 74% tenant retention, as I mentioned, with the statistics showing some moderating of growth on a smaller size -- smaller sample size of leases completed. We have less than average number of leases expiring in the next 2 years, averaging around 10% each year. In addition to the new leases closed in the second quarter, we have derisked almost 50% of the next 6 months of lease breaks and expiries as of the 30th of June. A large part of the impending industrial vacancy risk is the expiry of a red guarantee in Sognevej and Copenhagen and the lease surrender indemnity in Vittuone, Milan, which enabled a major AI to be undertaken. We have good prospective tenant interest in both of these assets with significant leases already signed with [ Lesseplex ] for 4,700 square meters starting from the 1st of October this year in Sognevej and Stellantis for 11,000 square meters starting on the 1st of August in Vittuone. Advanced discussions are already underway for our key 2025 office leases across our well-located Dutch Grade A office assets, generally reaching higher rents to fund accompanying AEIs and energy-saving measures. We recently secured a new 10,000 square meter lease in Haagse Poort to a global asset manager, who acquired a business from our largest tenant in that property, National Nederlanden, and they occupy 52,000 square meters. We are in good discussion with this key tenet on its renewal requirements. We have also secured new leases in [indiscernible]. On the downside, a major bank has given notice not to renew 5,000 square meters in one of the crack off assets in 2025. And with that, I'll now pass back to Simon to discuss the sector information in more detail.

Thanks, Shane. I'm just giving some color on both of our key asset class segments. So Slide 23 reflects the light industrial occupancy, which remains close to a record level of 98%, flat on the quarter and underpinned by 64,000 square meters of leasing. Rent reversion was a very positive 6.9%. It was actually 11.4% in the second quarter. Some examples include a 5-year lease in Jena in Germany, for a 23% increase in rent, ensuring 100% occupancy in that property and a new 3-year lease in Naverland 8, and Copenhagen was also signed at a 19% rent reversion and display that income in this sector is continuing to grow. The sector WALE has been maintained at a very healthy 4.9 years. So more specifically in logistics, this record occupancy of 97.9% can be explained by the continued leasing activity and increased occupancy across most of our countries, with 5 countries at 100% occupied. While the green line, you can see Denmark continues to improve. Pleasingly, Parc des Docks, our flagship asset in Paris has moved occupancy up 5 basis points to 95%, lifting France to 98% overall as we continue to rotate older tenants on lower rents to upgrade at significantly higher rents. This strategy has underpinned both, the income and valuation, growth of around 60% since we acquired this asset. We are also making good progress with the planning authorities for a substantial redevelopment of the site. So this next slide shows European market data for the logistics sector. The chart on the left -- top left-hand side shows the high quarterly take-up of the logistics space during the last few years with another good start into 2023 in spite of the slowing economy. The green line shows that overall European logistics vacancy sits at a new record low of 2.3%, a new record low of occupancy at 2.3%, similar to our own portfolio statistics. This situation is partly explained by the chart on the top right, where we continue to see growth in the e-commerce sector continuing to accelerate since COVID. And some of the key markets in which we operate, we still expect further room as a percentage of total retail sales for e-commerce to growth, as shown in the pale blue boxes on that top right-hand side. Occupier desire for supply chain resilience and security continues to be another major driver of light industrial and logistics. Recent events like the pandemic, the Ukraine Invasion and protectionist national policies have illustrated the risk of having long complex supply chains, which is leading occupiers to store more inventory and localized supply chains. This takes time. It's not a quick task to move production from Asia to Europe as an example. So it's a long-term tailwind that we expect to continue. A good example of onshoring to protect local industries from future supply shops is the new European semiconductor policy to lift European ship production from 9% to 20% of global production by 2030. A recent Savills report highlights that the EUR 43 billion of planned investment could lead to demand for a further 10.8 million square meters of warehouse and industrial space. We're also pleased to have secured ASML, Europe's largest chip fab manufacturing machinery producer as an office tenant in one of our Dutch buildings now. Turning to office. Leasing activity in the office portfolio accounted for substantial 60,000 square meters of new leases and renewals with a positive 5.7% rent reversion rate, again, driven primarily by demand for Grade A offices. This is a thing we've spoken about for the last 18 months. Overall, the half year occupancy for the office portfolio remained slightly below 90%. And the WALE slightly decreased to 3.6 years. An example of a major lease was to Vodafone renewing a lease for 12,000 square meters for 6 years in Ivrea, Italy. The next slide shows office leasing in the second quarter was still dominated by renewals, which explains the high 79% tenant retention rate. The drop shown in Italy was largely caused by the mathematical impact from the sale of Piazza Affari, which was 100% leased at the time of sale, and so it's no longer part of the portfolio stats at the end of June. Once Nervesa 21 development is completed in Milan, it will also be added back into the stats and expected to be fully leased by the early next year on completion. It's also pleasing to see that the Dutch portfolio is stable with office tenant demand attracted by quality and energy-efficient space in the core office locations. We've also benefited from the increase in rent coming out of the key car park in Rotterdam, which again goes to the back to work -- back to the office trends that we're seeing. We recently secured a new 10,000 square meter new lease in hub support in The Hague to a global asset manager, who acquired the underlying business from our largest tenant, National Nederlanden and has elected to continue for another 15 years in this building. We are in positive discussions with our largest tenant in this asset on its renewal requirements due in the next couple of years. A global energy company also commenced a lease for over 6,000 square meters in Haagse Poort, taking occupancy to almost 100%. We've also secured new leases in [indiscernible]. On the downside, as Shane mentioned, we have received notice not to renew a 5,000 square meter lease in one of our crack off assets, not out until 2025. So we've commenced leasing marketing campaign now. Also, given it's quite topical, just to point out that we have no exposure to [ WeWork ] with only less than 3,000 square meters out of almost 2 million square meters leased to two smaller co-working operators. Two of our Polish assets are in advanced stages of sale to local developers where current occupancy levels are not a key priority given the pending conversion projects. So we expect overall leasing activity to remain muted for our portfolios in the B-grade assets in Paris, Helsinki and Poland, where vacancies of such assets are materially higher than that of Grade A. Of course, we are partly compensated by this by the higher running yields that we acquired these assets at. The next slide shows the European office sector leasing activity, where rental values continue to grow positively for well-located Grade A assets. More notable in the middle chart, CEREIT's Grade A office vacancies are substantially lower at 3.5%. So Grade A office markets in our key cities that we invest in very tight 3.5%, and this is only up about 10 basis points from a quarter ago. Milan, pleased to announce now has a Grade A vacancy of only 2.4%, vastly different condition to other global office markets. However, the chart on the right-hand side shows the high vacancy in the Polish and Finnish markets at 14%, continuing the decline from the last quarter, which does give the context to our intention to divest CEREIT's office assets in both these markets in the medium term. We do believe that our focus on rejuvenating suitable order book well-located assets in Milan, The Hague, Rome and Amsterdam will drive superior risk-adjusted returns in the medium to long term and take advantage of the tenant's increasing needs for attractive staff amenities, energy-efficient buildings and green label assets. This next slide we'll whiz through. It's really just demonstrating a previous topic that the majority of leases these days really are being targeted at the Grade A substantially higher than where we were pre-COVID. So I'm really pleased to show in Nervesa that we're on track for completion by beginning of next year and on budget. The structures are 100% in place. Civil works are at 70% completion. And importantly, all major components and parts are now on site. So in terms of key construction risk that's now behind us. From a development leasing perspective, really pleased in the last couple of weeks that we've taken the leasing now up to 70%, still 6 months ahead of planned completion. The incoming tenants that we've attracted include a very substantial global entertainment company, a tech unicorn, backed by Tencent and a global relations agency with revenues over EUR 1 billion. When we commenced the project, our feasibility rents at the time were only EUR 250 a square meter. And with this growth I've spoken about, we are now achieving well over EUR 350 a square meter, highlighting the limited options for tenants seeking such quality space. The next slide just highlights the completion of one of our Czech Republic projects, Lovosice ONE. It's been delivered in two phases in December last year and more substantially and more recently last month for a total cost in line with budget of EUR 15 million, which is for around 18,000 square meters of five units. We are pleased with the leasing to date with over half the units now leased and advanced negotiations underway for the remaining three units to international e-commerce and 3PL operators. So in conclusion, CEREIT has now achieved a majority 51%, majority weighting to logistics and industrial pending the completion of the tax police asset in Bari. As a reminder, this is a strong pivot that we commenced 3 years ago. CEREIT divested EUR 135 million in assets at a 5.4% premium, executing on our recycling strategy to fund enhancing projects such as Nervesa, which is well on track to exceed our expectations. Valuations were moderately down 1.6% for the half, leading to NAV per unit of EUR 2.30. LTV is sub-40%, below that psychological barrier and with EUR 500 million now or 20% plus headroom to the 50% MAS limits and our loan covenants. Occupancy remains high at 95.4%, helping to drive positive 4% like-for-like NPI growth and almost 9% like-for-like growth in our logistics portfolio, which largely offset the impact from the higher interest costs. So first half 2023 dividend per unit was EUR 0.779. That's only 4.5% lower than prior corresponding period, adjusting for the more conservative approach on no top-up out of capital -- realized capital gains to be made in this first half. So notwithstanding that, global real estate fundamentals aren't expected to improve for 1 year or so, but Europe is expected to outperform the other major markets with supportive tailwinds in logistics, in particular, while inflation indexation, which is common in Europe, is helping to offset the rise in interest costs in the short term. We continue to progress further divestments to guard against the potential impact to valuations from slowing economic growth and enable the funding of our ongoing AEI and asset rejuvenation program. So while these may have a short-term impact on DPU, the risk/return profile of the portfolio is expected to continue to improve and provide a more sustainable footing over the medium to long term. So the Cromwell European REIT annualized 10% DPU yield at today's unit price. And a 35% discount to NAV per unit does compare favorably to the 7% yield in the sector and only the 4% discount to NAV per unit and the premium that the industrial and logistic REITs are trading at, which we now have a majority weighting to. So we're confident in the medium- to longer-term cyclical recovery, and we will be well placed with Cromwell's teams on the ground to take advantage of our competitive position when the market stabilize. So with that, Kara, thank you, and we'll open it up to questions. Thank you.

[Operator Instructions] Our first question comes from Dale.

I just wanted to ask two questions first. I think the first one being the capital gains distribution. I think previously, it was guided that capital gains will be used as a means to top up absence of income from redevelopments. But just wanted to understand why the change in this distribution in this first half? And how should we see it going into the rest of the year as well as into next year?

Thanks, Dale. And yes, it was a long debate in the Board meeting on Friday on this topic. Really, where the unit price is situated at such a high yield and with such a big discount to NAV, we just felt it was the prudent thing to do in terms of retaining capital. So that's the first point. Again, secondly, we wanted to make sure that gearing remains at below that psychological level of 40%, which differentiates us with many of the other REITs. And so with the rising in debt costs and obviously a very high cost of capital, we just felt it was more prudent to retain, I think we're now sitting on about EUR 21 million of realized capital gains, and we just felt it was the right thing to do for this point in time. I think by the factor that -- you can see that the Board takes this capital management decision quite seriously. It's premature to provide guidance because really, it's set at the time of the results, taking into account everything that we've spoken about.

Okay. Okay. Got it. But I mean, going forward, how should we be looking at this capital gains distribution, should we be looking at total yield perspective or your discount to NAV? Or how should we make assumptions for this?

Yes. I think when you go back to this chart that Elena has put on, this loss of income of [ 0.5%. ] Really, this is -- this year is the lowest of the -- or the widest of the impact because from beginning of next year, we'll start to receive the income from Nervesa and then perhaps a year or 18 months after that, depending on the decision on Maxima, it will also start to be income producing. So in terms of the biggest impact to the dividend, we would expect it to be this year.

Okay. Okay. Got it. And moving on to my next question, it's for Shane, with regards to financing costs. Correct me if I'm wrong, you were saying that assuming the RCF -- when RCF is drawn down, financing costs will hit about 3.3%. Just wanted to reconfirm this, and what is the expectations for this drawdown in the RCF?

Yes. So I guess, 3.3% is sort of worst-case scenario fully drawing the RCF of EUR 165 million, right? So we wouldn't expect to completely fully to draw it, but we're just showing that as a sensitivity at the outside end of the spectrum, I guess. But definitely, with the new financing and with the increase in 3-month Euribor, getting close to 4%, then we're looking at 3% -- above 3% as the all-in interest cost.

Dale, we've seen some research across the sector, and we're really thrilled to be able to show that for the next 2.5 years, we're almost 100% hedged or fixed, really taking away that uncertainty around rising interest rates, how much longer to go, what is your impact, how will it come through DPU? And so in Shane's prepared remarks, again, you could hear that there really isn't going to be much of an increase in costs in spite of the rise in part because of the hedging and in part because we have no debt maturing for another 2.5 years. So we've really taken that risk out. And the other aspect from a risk management perspective is our loan covenants have now been increased to 50% in line with the MAS limits. So that gives us a good EUR 500 million of buffer for those limits. So again, that question of uncertainty, we've really removed.

Okay. Got it. But just also wanted to confirm is the guidance that all-in financing would still be around that 3% come year-end?

That's right. So it's 94% hedged now, and we will obviously use the RCF for ongoing development CapEx. But the 3.3% is on the basis of fully drawing on that, which is unlikely.

Our next question comes from Terence.

A few questions. The first one is: What is your expectation for 2024 rent growth amidst this slowing inflation print? And perhaps, could you discuss how much broader market rent growth you would expect in 2024 versus how much leases in your portfolio that are still on the market? That's the first question.

Okay. So look, we're obviously going to be reluctant to provide two forward-looking guidance. But specifically, we get a lag effect from inflation. So if you think about inflation this year, so when we come to our indexation of rents next year, it's based on the preceding inflation. So we get a really nice 1-year lag. So that's the first thing I'd say. I think the second aspect, and we -- I think one of the only REITs that provides this information. So from our valuers, we've provided our reversion [ review ], which today is 7.4% versus our initial yield of 5.9%. What does this mean? Well, this means the valuers are expecting that substantial income growth to drive the yield from 5.9% up to 7.4%. So that's taking into their view of market rent growth or ERV as they call it, plus their view of occupancy. So 5.9% initial yield, 7.4% in sort of the next 4 to 5 years gives you a very good flavor as to how the value is forecasting our cash flows.

Got it. And how confident is management of pulling off more divestments [indiscernible] Poland? I mean the first half, as you mentioned, was tough in Europe as it is and borrowing costs have only gone up further since.

Yes. So as we said in our prepared remarks, there's still a very good bid in the EUR 20 million to EUR 50 million lot size by private investors, not needing much debt. So really, the big slowdown is in the $100 million-plus property sales, which have almost dried up. So that's the first point. The second point is, we also said in our prepared remarks, we're on track to deliver more than EUR 200 million of divestments for the full year. And that includes the EUR 94 million that we've conditionally sold the tax police in Bari Europa in Italy. So we're expecting that to close before the end of this year. Specifically on Poland, we're in very advanced discussions on three of the six assets. And on Finland, we're not as advanced. That's a smaller market for us, around 2.5% of our exposure and certainly is a much tougher market to catch it in but certainly making good progress across the rest of the portfolio.

Got it. Then last question on Page 26 of the financial statements announcement on Note 13(c), which is basically your valuation assumptions, the [indiscernible] have moved up the capitalization yields, but they did not do so for the DCF method. So the question is why? And if they had done so, would valuations have fallen further?

So there are two valuation techniques. There's the DCF and then there's the income capitalization method. So on the DCF, they absolutely lifted the risk-free rate and the risk premiums. And also, the exit cap rates were also lifted. On the income capitalization method, cap rates were lifted 74 basis points.

[Operator Instructions] We do have an additional question from Dale.

Okay. I just wanted to -- I think congrats on the strong pre-leasing at Nervesa. I understand that it is expected to complete in the first Q of next year. Just wanted to understand in terms of the income flow, should we also be expecting it in the first quarter or second quarter onwards?

Yes, it should start to come through in the first quarter. There were -- as you'd imagine, there were some small amount of tenant incentives provided in particular, a few months of rent-free and that will obviously be amortized over the first term of the leases. But again, the rent growth we've achieved relative to when we started this project is very pleasing.