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Mapletree Commercial Trust
Earnings Call Analysis
Q2-2025 Analysis
Mapletree Commercial Trust
In the second quarter of the financial year 2023-24, MPACT demonstrated admirable resilience reflecting its strong portfolio in Singapore. The company's gross revenue reached SGD 225.6 million but saw a decline of 6.5% year-on-year, attributed primarily to the divestment of Mapletree Anson and weakened performance overseas. However, excluding Mapletree Anson, Singapore properties exhibited a modest revenue growth of SGD 1 million year-on-year, driven particularly by the robust performance of VivoCity, which continues to draw in consumers despite ongoing asset enhancements.
The net property income (NPI) for the second quarter dipped by 8.5% to SGD 167.7 million. The weaker performance also influenced the amount available for distribution, which fell by 11.9% to SGD 104 million, resulting in a distribution per unit (DPU) of SGD 0.0198, down 11.6% year-on-year. Adjusted for one-off factors from the previous year, the normalized decline would be 9.6% year-on-year. These reductions suggest a need for MPACT to strategize effectively to stabilize yields moving forward.
The property operating expenses increased slightly by 1.7% to SGD 57.9 million, reflecting a one-off property tax refund recorded last year that wasn't repeated this year. Additionally, MPACT showed a slight decrease in net finance expenses by 2.6% compared to the previous year, totaling SGD 56 million. This was largely due to a reduction in borrowings following the divestment of Mapletree Anson, partially offset by higher general interest rates. The company remains vigilant in managing the overall cost structure in light of rising interest rates.
The portfolio in Japan has faced significant challenges due to non-renewals of master leases, particularly impacting the valuation of three assets in the Makuhari area, which saw valuations decrease by approximately 17% since March 2024. A notable worst-case scenario anticipates this segment contributing SGD 30 million moving forward, a drop from recent contributions of up to SGD 60 million over the next three to five years as MPACT adjusts to a multi-tenant model amid current leasing difficulties.
MPACT successfully reduced its gross debt from SGD 6.8 billion in June to SGD 6.1 billion in September following the divestment of Mapletree Anson, enhancing financial flexibility. The leverage ratio improved from 40.5% to 38.4% as a result. With a debt headroom of SGD 3.6 billion, the company remains comfortably positioned at a gearing level below 40%, which is crucial for future investments or acquisitions.
Looking ahead, MPACT's management indicates cautious optimism amid a challenging market landscape, particularly in Hong Kong and China where rental rates continue to face downward pressure amidst oversupply. While rental reversions in the Singapore portfolio remain healthy, they have broadened slightly in overseas markets, indicating potential revenue risks ahead. The company plans to focus on retaining occupancy rates, strategically leveraging asset demographics, and exploring potential acquisitions if favorable opportunities arise.
Despite recent downturns in tenant sales at both VivoCity and Festival Walk by around 4.1% and 4.8% respectively, MPACT noted improvements in footfall traffic suggesting a rebound possibility as consumer confidence gradually returns. The management is also enhancing the consumer experience through asset improvements and event collaborations, such as Disney-related promotions, pointing towards a strategy focused on adapting to evolving retail environments and consumer preferences.
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Good evening, esteemed analysts, investors and members of the public. Warm welcome to MPACT's Analyst Briefing and Live Webcast for our Results for the Second Quarter and First Half of Financial Year 2023-'24. I have the distinct pleasure of hosting today's results briefing. Allow me to introduce our speakers for today. They are; Ms. Sharon Lim, Chief Executive Officer of MPACT; Ms. Janica Tan, Chief Financial Officer; and Mr. Koh Wee Leong, our Head of Investments and Asset Management. We will be presenting our financial results, providing key business developments and sharing market insights. Following the presentation, we'll open the floor for Q&A where we invite you to ask questions or seek further clarification on our results.
Without further ado, I will hand the floor over to our CFO, Janica.
Good evening. I hope everybody can [Technical Difficulty] this quarter's results underscore the resilience of MPACT's Singapore portfolio amid diverging overseas headwinds. Through the strategic divestment of Mapletree Anson, coupled with steady performance of the Singapore assets, provided some cushion against the effect of diverse conditions in the overseas market. Second quarter FY '24-'25 gross revenue, SGD 225.6 million and NPI SGD 167.7 million were lower by 6.5% and 8.5% year-on-year respectively. So this largely reflects reduced contribution from Mapletree Anson following its divestment on 31 July, 2024 and lower contributions from the overseas assets, which was further impacted by the strengthening of Singapore dollar.
Excluding Mapletree Anson, the Singapore properties recorded a revenue growth of SGD 1 million year-on-year, led by continued robust performance of VivoCity despite the ongoing AEI at B2. The property operating expenses were higher by 1.7% at SGD 57.9 million, mainly due to a SGD 2.8 million one-off property tax refund, and this is relating to VivoCity recorded in last year and not this year.
Moving on to net finance expenses for the quarter. Net finance expenses were 2.6% lower at SGD 56 million as compared to second quarter last year. And this was mainly due to the repayment of borrowings using the net proceeds from the divestment of Mapletree Anson and partially offset by higher interest rates as the lower fixed rate [ legacy ] interest rates were progressively lower. So amount available for distribution, SGD 104 million, 11.9% lower. DPU SGD 0.0198, down 11.6% year-on-year. If we were to exclude the one-off property tax refund received last year, the DPU would be at 9.6% year-on-year.
This slide shows the contribution by different markets. Excluding the results of Mapletree Anson and the one-off property tax refund received in last -- second Q last year, both gross revenue and NPI of Singapore properties were higher year-on-year. The 2 core assets accounted for more than 50% of the portfolio's gross revenue and NPI. The lower contributions from the overseas properties were mainly due to weaker performance because of lower occupancy, negative rental reversion and unfavorable FX impact from depreciating Japanese yen and renminbi against Singapore dollar.
Moving on to first half. Gross revenue and NPI decreased by 3.3% and 4% year-on-year to SGD 462.3 million and SGD 347.1 million respectively. This was similarly driven by the reduced contributions due to divestment of Mapletree Anson and we see overseas contributions further dampened by adverse foreign exchange effects. Net finance expense for first half was SGD 115.5 million, up 3.4%, mainly due to higher interest rates on Singapore dollar, Hong Kong dollar and Japanese yen borrowing as legacy low fixed rate IRS progressively taper off. This was cushioned by the reduced borrowing after divestment of Mapletree Anson.
Amount available for distribution for first half was SGD 214.7 million, down 7.8%; DPU SGD 0.047, down 7.9% year-on-year. Excluding Mapletree Anson, gross revenue contribution by Singapore properties would be at SGD 5.1 million higher year-on-year. And excluding Mapletree Anson and one-off property tax rebate refund, Singapore properties NPI would be at SGD 3.2 million higher year-on-year.
On balance sheet. In view of the non-renewal notice by FJM's master tenant and the localized market softness in the Makuhari submarket of Chiba, interim revaluation was carried out on the 3 Makuhari properties, namely MBP, MBT of Seiko Building and FJM. This resulted in a 17% drop in fair value as compared to their respective valuation conducted in March 2024. Wee Leong will go into more detail on this revaluation later. So as a result of this revaluation and plus the adverse FX impact, NAV per unit was at SGD 1.71 as at 30 September, lower than that of 31 March, 2024.
Moving on to capital management. So utilizing proceeds from the Mapletree Anson divestment to reduce floating rate debt, the total gross debt was lowered from SGD 6.8 billion as at June to SGD 6.1 billion as at September. So however, the interim valuation of the Makuhari properties partially offset the positive impact of this debt reduction on the leverage ratio. So consequently, the aggregate leverage ratio improved from 40.5% last quarter to 38.4%. At 38.4%, the debt headroom was SGD 3.6 billion to 50%.
And assuming total borrowing remains unchanged, it will take about SGD 3.6 billion drop in IP for gearing to reach 50% and that is about cap rate expansion across the whole portfolio of more than 100 bps. And the weighted average all-in cost of debt for first half was 3.56% per annum and adjusted ICR remained the same as last quarter, 2.8x on a 12-month trailing basis. By the close of the financial period, MPACT has a financial flex of about SGD 1 billion in cash and undrawn facilities, ensuring sufficient liquidity. The debt maturity profile remained well spread with no more than 24% of debt expiring in any financial year.
On the next slide, the fixed rate. The fixed rate debt portion was raised from 78.9% to 83.6% during the quarter and this was mainly due to the paydown of floating rate borrowings with Anson's proceeds. So with 83.6% of debt on fixed rate, every 50 days change in benchmark rate is estimated to impact the DPU by SGD 0.08 per annum. And at the close of the quarter, approximately 90% of MPACT's expected distributable income on a rolling fourth quarter basis was derived from or hedged into Singapore dollar. Last but not least, on the distribution detail. DPD is on 4 November and payout date is on 6 December.
I will hand over to Wee Leong.
Okay. So good evening, everyone. Maybe I'll start with the committed occupancy. So you'll see that MBC has maintained its committed occupancy at about 92.5%. There are a number of vacant spaces that came in, in this financial year, namely the 2 floors that Google had given up as well as Bank Julius Baer's space, both of which were given up in the first quarter. We are still in the progress of leasing out some of these spaces. We hope to have some better news for everyone over the next half year or so.
VivoCity occupancy came down just a little bit and that's largely due to the asset enhancement activities that we are doing in Basement 2. For the other SG properties, occupancies remained strong. Of course, for this quarter, the other SG properties are only mTower and ARC because of the divestment -- sorry, mTower ARC and Bank of America HarbourFront because of the divestment of Mapletree Anson with effect from 30th of July. For Festival Walk, occupancies are now at 96.4%. The 3.6% vacancy there is largely due to office -- largely due to vacancies at the office component of Festival Walk. We are in the progress of signing up a number of leases. We hope to get this number -- this occupancy up a little bit more over the course of the next 2 quarters. China occupancies, the 87% number is for the 2 assets. For Gateway at Beijing, the performance is better and this is at -- committed occupancy is now at 91.2%, whereas for Sandhill Plaza, that's hovering at about 80% and has been for the last 2 quarters or so.
For Japan, the biggest change is actually in the Japan portfolio. And you will see that in this year's numbers, the performance at Japan has dragged down the portfolio occupancy quite a bit, largely due to the fact that even though the Japan portfolio is about 8% of our portfolio valuation, it's about 20%-ish of our portfolio net lettable area. So it has quite a big impact on the valuations. So if you look at the change in occupancy for Japan assets, that's largely due to the non-renewal of the master lease at Seiko Building that the tenant has largely left the building. Only about 26% of the net lettable area is currently leased out to subsidiaries of Seiko who have remained within the building. That's caused the drop in occupancy for the Japan portfolio. Pinnacle Gangnam, now about 92.7%. There was an unexpected non-renewal of this tenant as well as a bit of softness in the retail part of the asset.
So moving on to rental reversions. So the Singapore portfolio rental reversions remain very healthy. MBC at 2.5%, Vivo at 17.3% and other SG properties at 8.8%. Festival Walk rental reversions have widened slightly. But however, if we look at the leases that were signed prior to the social disturbances in 2018, the rental reversion for the remaining assets are still slightly positive. The China properties rental reversion has widened very slightly. It was negative 1.3% in the previous quarter now it's about 2.9%. Rental market in both Shanghai and Beijing still remains soft and there is increasing pressure on rentals as well as occupancies.
Japan, that's largely due to the Seiko non-renewal and the underlying leases coming in. And for the Pinnacle Gangnam, this is actually due to just 2 retail leases at the building, both in Basement 1 and Basement 2, totaling only about 3,400 square feet. So the remaining performance of the office is still fairly healthy, but the fact is that we are seeing a little bit -- sorry, the office rentals are fairly toppish. We unlikely to see significant increase in rentals from this point onwards. But our current rentals are still a little bit below where the market is. So likely that we can still see a bit of positive reversion for the office side going forward.
So moving on to WALE. So office WALE is now 2.5, while retail remains at 2.2. In terms of performance, maybe we can move straight away to the valuation. So like Janica mentioned, we have conducted a revaluation of the 3 assets we have in the Makuhari area of Japan. This was triggered by the non-renewal notice, which we had received from Fujitsu for their space at Fujitsu Makuhari Building. Because of the change in the structure of the lease, it was previously a master lease double net basis. So when this change occurred, we had to now value the building as a multi-tenanted building.
The main changes are actually 2-fold. First and foremost, of course, there will be additional operating expenses being incurred in the building. The second thing, of course, is that there will now be vacancy that will accrue to the building because of the non-renewal. Unlike in Seiko, where a chunk of the -- where a portion of the tenant had remained at the building, this will not be the case at Fujitsu where the building will be vacant after the expiry of the master lease.
For the other 2 assets, what has also happened is that at the point of this valuation, the valuers have taken a look at the market rentals in the Makuhari area and compared against March '24 valuations, they have brought down the market rentals very slightly, about JPY 500 per tsubo. So the valuation impacts that you will see are due to this -- are largely due to the reduction in market rentals for MBP as well as for MBT, whereas for Fujitsu it's largely due to the conversion from a single-tenant master lease to a multi-tenancy basis. So we will continue to actively assess strategic options for these 3 buildings. We have been looking at potential change of users. We have also been intensifying our marketing efforts to try and re-let new tenants. And if and all possible, we will be pursuing them as opportunities as well.
So maybe moving on to VivoCity. So VivoCity shopper traffic while down 2% on a half year versus half year basis, if you compare just the second quarter against last year, it's up about 1%. And on a quarter versus preceding quarter basis, it's actually up about 5.6%. And I think that reflects first thing that there probably is some shift in shopper traffic coming -- shopper traffic and tourism traffic coming back to Singapore, especially in the second quarter as well as potentially people traveling a little bit less in the second quarter of our FY.
Tenant sales on a half year versus half year basis is down about 4.1%. But -- and on the second quarter versus last year basis, it's down about 4.8%. And however, on the quarter-on-quarter, second quarter versus first quarter basis, that's up about 1.6%. A little bit of this is actually affected by downtime, comparing this year -- this quarter, second quarter against last year's second quarter, aside from the fact that we have the asset enhancement activities going on in Basement 2. We also have more tenants in the mall undergoing fit-out and downtime in this current quarter against last year. Overall, that's resulted in the 4.8% drop on the second quarter versus last year basis.
So like I mentioned, there is asset enhancement activities undergoing in the mall currently. So the first phase is to upgrade the Basement 2 food kiosk area. We have done some of these. A number of the shops have actually opened -- a number of the kiosks have actually re-opened in the middle of October. And you'll see some of the new-to-mall brands as well as some of the returning brands on the slide here.
So we have continued to refresh the concept and the tenancies within the mall. And these are just some of the new tenants that have come into the mall as well as some of the tenants that have refreshed or relocated within the mall. We continue to drive shopper traffic through events and activities within the mall. For this past quarter, we collaborated with Disney on Donald Duck's 90th birthday. And that was done in conjunction with our Mid-Autumn Festival Celebration.
Moving on to Festival Walk. Here, the shopper traffic numbers are a little bit more positive, whether on the first half or second quarter as well or second quarter versus first quarter basis, those are all up, reflecting increase in shopper in tourism arrivals into Hong Kong, especially for Mainland China. However, shopper tenant sales remain weak. That's largely attributed to the changing shopping habits of Hong Kongers, driven by the fact that their currency remains very strong. There is still a significant number of Hong Kongers who travel out of the country over the vacation period and that's contributed a little bit to the drop in shopper -- in tenant sales.
Looking at the Festival Walk's tenancy mix, we have looked to increase experiential as well as lifestyle concepts. So now the mall has a gym. We are looking at a number of other changes in the mall as well. Activities in terms of advertising and promotion remains very strong at Festival Walk, and these are some of the activities that we have done over the last quarter. They seem to be very good at -- the team there is very, very good at attracting staff to come and host events within the mall. Last but not least, I think we mentioned this earlier, the divestment of Mapletree Anson was completed on 30th of July. So that's improved the aggregate leverage ratio of the REIT. It's also improved our ICR as well as our debt headroom.
I think we can -- perhaps we can go on to Q&A.
[Operator Instructions] So first we have Terence from JPMorgan.
This is Terence from JPMorgan. For my first question, I'd actually like to understand a little bit more about Japan. How long should we expect the downtime to last for these 3 properties? And I can see that Japan, the NPI margins have dropped quite substantially. So is this sort of like stabilized NPI number going forward, notwithstanding the Fujitsu lease?
Maybe I'll take this question. Fujitsu lease is all the way to 2026. So right now, we are still enjoying the master lease income. They have given us the notice that they will not renew. So that will depend on how fast we can lease it up.
Now if you ask me a very pointed question of how low can it go, like I mentioned as a ballpark, on an extreme case basis, it means that we are talking about in the next 3 to 5 years, the worst case, we are talking about Japan was contributing, let's say, about SGD 60 million. Worst case, not tomorrow, it will drop all the way down to SGD 30 million, half because it's about half the asset. If you put it at [indiscernible] it will be around SGD 30 million. And that is now all the way to Fujitsu, we still have income. MBT is still -- is already multi-tenanted and is still continuing. So that is as a general guide in, let's say, 4 to 5 years on a worst case basis, that will be the general drop.
Now I want to put it into perspective, yes. You may see the drop. Let's look at in relation to the other leases. Maybe I'd like to touch a bit on the WALE, its contribution and where the outlook for Japan would be for our Makuhari assets. So I think I've already given you the worst case of the Makuhari assets. It's not going to be immediate impact. It will be beyond 3 years and longer to even get there to that level. So that is the worst case.
The valuation, I think a lot of people may want to ask why do we do a reval. I think it was triggered because of the notice that was given by Fujitsu. Out of prudence, we decided that we should reval. SGD 120 million is less than 1% of our entire portfolio. And just to give you a perspective, the -- if you look at the occupancy, you may see that, hey, the occupancy is low, but the value per square foot of rental that is contributing is actually very low. If you're talking about below SGD 2 a square foot, just for a matter of perspective, and you convert the tsubo into per square foot Singapore dollar, yes. So that's when -- if you look at Seiko, Seiko is equivalent -- the whole building is equivalent to a Hong Kong supermarket. Fujitsu, whole building is equivalent to 1 lease in MBC.
So that is to give you a sense of the relativity of what we're facing. I'm not belittling the fact that there is softness in there. So I think we have been guiding that there's some softness in the Makuhari assets. And now we are -- we have reval because of the notice of the Fujitsu, I'd like to put it in context on the impact of it. Worst case, SGD 60 million down to SGD 30 million for Japan. And that is on a longer term basis, not 1 year, not 2 years, not 3 years, I'm talking of beyond that, on a worst case basis, yes.
Maybe just to follow-up on that. With the rebound, your gearing or, let's say, your debt to...
Yes. The gearing has been taken in consideration at 38%. We are still comfortable at the LTV level and the coverage and all. The gearing impact itself, I think we are still in the safe zone, way below the 40%, as of now at 38%. So I think we are comfortable at this level. Even at over 40%, we have always said that we are comfortable. But right now, we are -- even taking into consideration the SGD 120 million, we are at 38.4%.
Let's put it in a perspective of what is SGD 120 million, SGD 120 million is less than 1%. Last year, there's a ForEx move on the valuation, just the currency itself when we just translate it, it was over close to SGD 300 million. And with the AI works coming up that we have done, the worst of it is definitely more than SGD 150 million. So if we were to delay it to our yearly val, I think Vivo itself can more than cover.
So just matching Japanese yen debt to Japanese yen assets, is there a risk of over-leverage given that you have taken such a big rebound in the Japanese yen assets?
I think we are still comfortable. The banks are not -- nobody is making any noise about it. So I think we are fine with what we are -- where we are. We do have a little bit -- we do have a very small overhedged position. But once we -- once our [ CTH ] roll off, we will be in a better position, we will be in 100% position. It's very, very, very small, yes.
Okay. And final question from me. Would you consider or would MPACT consider top-ups given that there could be some DPU decline?
No, we normally -- top-up using debt, no. If we talk about borrowing money to top it up, we don't see the need to do so. I think it's not sustainable. And we would like to -- DPU typically has to be from operations as opposed to borrow from the bank and give it to you. Yes, it doesn't make sense from my perspective.
Next, can we have Geraldine from DBS. Geraldine?
Maybe just a follow-up on Makuhari building. If you were to multi-let, have you taken a look at the rents as compared to what you were getting from the anchor tenant previously? I'm not sure if it's too early to ask.
So the valuations have really taken into account the differences in rentals between the multi-let and the single tenant. So for -- the difference actually is a little bit -- the differences are varied. Each building is slightly different. Ranges from somewhere -- ranges from between only about JPY 500 per tsubo to about JPY 2,000 to JPY 3,000 per tsubo. Not sure if that answers your question.
Okay. So the JPY 500 is the anchor rent and the JPY 2,000-plus per tsubo is the...
No, what I meant is that the difference between the anchor rentals and the multi-tenant rentals, the anchor rentals are typically a little bit higher. That difference between the anchor rental and the multi-let rental is about -- usually about -- it's about JPY 500 to about JPY 2,000.
And just back to Singapore MBC, there were 7 leases signed this half. Can you share a bit more about the tenants that signed with you this half? And any more prospective tenants that is potentially in the picture?
The 7 tenants is a mixture of office and retail tenants. The number predominantly comes from the office tenants. The retail tenants are quite small. These are renewals as well as a small number of only about 1 or 2 new leases. Generally, the tenant mix hasn't changed. It's still a mixture of technology companies as well as FIs. We are prospecting for -- we are in negotiations with a number of tenants for the vacant spaces within the building. And when we are able to have those signed off, then we'll report that.
Next, we have Rachel from Macquarie. Rachel?
Maybe just back to the Japan properties, I think in your slides you mentioned that there could be potential change of use or potential divestment. How realistic are those options?
You still have to try because I think there is some restrictions in terms of land use and Japan itself, conversion will take a bit of time. I mean, if you talk about conversion into DC, then you will have -- or selling it as a DC, you need to have the power and that will need time to talk to TEPCO and all. How realistic, I would say that we put a longer term horizon on it as opposed to immediate.
Okay. But if you do go on that route to change of use, would you look to develop it or you would look to sell back to sponsor and develop?
I don't think I'm looking at the sponsor. I think we will have to look at what is the best use and whether we are capable of doing it. I mean, if it's a different sector, obviously, we will not go into it. Let's say, for example, if it's conversion into student housing or ability to, assuming it can, that's not my core expertise. So we have to be able to sell it. If you ask me, I would rather sell it as opposed to do it because it's not within our mandate or our core capabilities.
Okay. Got it. Then maybe just on Festival Walk. Could you give us some updates in terms of how many more leases that has yet to be mark-to-market? What are your expectations on reversions moving forward? And I mean, softness in terms of the tenant sales have been slow in recovering. What do you see in the next few quarters?
I think what are the positives that we see out of Festival Walk. Footfalls are better Q-on-Q and so on and so forth they are better, footfall. Tenant sales, although it's down comparing, we are still better than the retail sales in the market. So I would say -- I cannot say that it's doing fantastically, but I would say that it's doing better than the market in terms of tenant sales, but I'm seeing positive in terms of the footfall.
Hong Kong is still -- there is still a little bit of softness in there. When we look at the rental reversion, when they analyze the leases, most of it was -- most of it that has already been renewed on time prior to the -- after the COVID, the reversion was not down. The down in reversion was due to leases -- lease that was done prior to COVID. So that has to come down, because this was -- they signed prior to COVID, then this is the first renewal after the COVID.
So I think we are still cautiously optimistic. I mean, if I look at the footfalls, I look at the sales doing better than others, but it's still just on a negative region. I would say that my team has done better than the market, but it's still not good enough compared to the old previous high. So we'll continue to do what we can and try to strip out a little bit more efficiency on the ground in terms of OpEx and so forth.
Okay. I remember last time, the remaining leases was about 10% or less. Is that still about the same figure?
One of the big -- this quarter took in one of the big ones. Yes, the supermarket is a big one into that. It's not that rest of the leases didn't look that bad. It's one lease.
Okay, yes. And I think the vacancies in the office side of Festival Walk, the rents, is it also still soft and will that impact as well?
Okay. I think the office is rougher than the retail.
The office has been rougher than the retail. This lease actually [indiscernible] to us that it was non-renewing a good 9 months to 10 months ago. We have been working to try and lease out the space. Only about half the space has been let out. That's why the committed occupancy is still short of 3.8% to full occupancy. We are discussing with a number of other tenants, but we have had to cut up the space quite a bit. It used to be one tenant only. Now we have turned into -- cutting into about 5 or 6 tenants. And unfortunately, rentals really have come down. In that location, we used to be able to do over HKD 30 per square foot. Now we are in the low-HKD 20 range. So office is rough.
So it's a very small component. I think we just have to deal with it and to make sure that our key anchor tenant, which is [ Era ] continues to stay. I think that lease is good until 2034. And that is a very, very huge tenant for us in terms of the office space, and that's already been done to 2034. So at least there's a very -- I would say that the stability is there for the office component. We just have to deal with the current vacancy. So we have to adapt. We have to chop it up, make smaller units as opposed to bigger units.
Okay. And maybe if I squeeze in just one quick one. Now that interest rate cuts have started, what else can you do with MPACT? You sold Anson. What do you think what else you can do with MPACT?
What do you mean?
Your gearing is okay. Interest rate cuts, what else would you do?
You're talking about acquisition in there?
Yes, acquisitions or divestments.
I think we just have to be still a little bit more careful because I think asset values are at certain level. In terms of the overseas market, the spread is still not really there. I think we can -- we are still in the market to look out as long as there is a good fit or an improvement to the quality and depth of our portfolio. So where I'm coming from is it's not that we have the gearing, we have the capacity, let's start and just do everything that we can. I think there is still -- the spread is still may not be attractive enough. There's only a few sectors and specific markets that has a spread. The rest does not seem to have a reasonable spread yet.
Can we have Brandon from Citi next. Brandon?
I just want to go back to the Festival Walk. I think last quarter, Sharon, you were saying that you're working on some AEI, right? Do you have any update on that front?
Sorry, can you repeat the question? Was that...
You're talking about AEI for which one, Festival Walk or...
Festival Walk, yes.
So Festival Walk, I mean, we are in process. The submission process and the regulation is heavier than Singapore any time. So we are already in progress. Consultancy is going on. And now we need to apply to certain regulators. So the process is a little bit more long drawn as compared to Singapore. So it's in progress. And for Singapore, it's well under its way. We are already -- we talked about entire basement going for conversion. We have started the Phase 1, and part of the Phase 1 has already started. So as you see that, hey, if some of the numbers are down, [indiscernible] because when we looked at the -- there were a lot more downtime, we actually stopped work and removed kiosk for upgrade and a portion of it has already started and that will progressively continue over the entire year. So different speed, I would say, different speed, and I'm very thankful that Singapore is very efficient.
Yes. And my second question, I think with the recent China stimulus and also the lower rates, do you think that we have a high chance of selling some of your Hong Kong, China assets today?
Okay. I think in terms of the China stimulus, everything is positive for sentiment. But what we want to see is more on the demand side moving up. A lot of stimulus is more on consumption and more on the finance and debt side. So if you look at it, the key for real estate is always demand. So hopefully, there will be more better outlook in terms of demand situation. The supply situation on the ground is huge, but it's not that the supply is huge. It's just the demand is lesser than previous.
So any good news is good on the sentiment, but we will still -- it will still take a bit of time for us to see that the demand starts coming back. So we have been probing along quite well, especially for Gateway. Gateway is one of the key CBDs within the Beijing side. So if you look at our occupancies and stuff, we definitely have stepped up. Occupancies and rent, we definitely have stepped up better than most of our peers. So we are thankful to a few of our anchor tenants that we did a year or 2 ago and that has given us a lot of stability.
So back to the stimulus, I think for the real estate sector to benefit, there will be, but we need to see it more from the demand angle, which the stimulus are more tilted towards borrowing and stock market as opposed to the demand there. I think that will be the second part. When tenant will come back, people have more optimistic in terms of the general outlook, then they will start expanding.
Before we go to the next question and move on from Festival Walk, I just want to clarify that the key office tenant at Festival Walk lease is actually good till 2030 not 2034.
We have again Derek from DBS. Derek Tan, pose your question.
So just a few questions. If I go back to Japan, Sharon, just curious whether -- given the options that you have, should we assume that the divestment option will be an accelerated option in your view or you still want to try to work this out?
I think if I can divest, I will tell you so. But it's a locational issue. Makuhari is a locational issue. So it will be a bit more trying to do so. I'll be very upfront if you.
Yes. And even at the latest write-down price, is this something you think can clear the market or if it's put up the market or do you think...
It has to be single user type. People who want to own their own building, single user, as opposed to somebody buying out to hold it for multi-tenant. So you will be a different subset of buyers, potential buyers.
Yes. Okay, got it. Okay, no problem. Then my next question is your interest cost. I mean, Janica give us a guide -- could you give us an update on how you see it trending the next year, maybe the next financial year? And do you have any low hedges that would expire that would spring a negative surprise in the coming financial year?
Actually, if I look at my interest rate swap or IRS profile, my interest rate swap with low fixed rate, which is fixed rate lower than the current prevailing swap rate, there's quite a fair bit more to go and it will last until FY '25-'26. Whether this will impact my borrowing cost, that depends on where the market is at the moment. Currently, those are still below the current swap rate. But having said that, I would think looking at the number that I have in front of me, the cost of debt should be stable because we have paid off quite a fair bit of loans using the divestment proceeds. So interest cost should come down and cost of debt should thereabout be stable around the rates now or around the mid-3s.
Okay. So the mid-3s. Okay. Got it. Sorry, last one for me, I'll look at Vivo, your star performer. But tenant sales has been a little bit soft recently. Just wondering whether the reversions that you're seeing, is it okay, you still can maintain?
Okay. You see we shut down quite a number of kiosks for AEI. We had a higher number of fit-out period compared to previous period. So that's one component. The tenant sales, you see that is -- actually there is better for preceding quarter. In fact, second Q is better than first Q and there's no festive zone mapping. And first Q was the one that was a drag which is March, April, May -- sorry, April, May, June. And I would like to associate that more to traveling during the June holiday. But if I take the Q2, which is July, August, September, it's better than Q1. So I think I'm not so concerned. I'm not so concerned. You know what I'm saying, right? The numbers are down because of majority of Q1.
Yes. I mean, people are still spending less.
Like AEI. You see my whole Basement 1, the first half and next to the escalator, the whole stretch of the kiosk was mowed down. So we tore it all out and now it's back. So when we do AEI, we still consider it. We don't go -- our sales calculation for the mall, we do not remove any of them because of downtime or AEI. We take a very simple approach of this entire mall sales. So definitely, during AEI period, definitely, the sales will go down if nothing else goes up.
Tan Xuan is [Indiscernible] Please unmute yourself and pose your question, Tan Xuan.
Sharon, on your overseas markets that are currently pretty weak, like Japan, I guess, you mentioned you expect weakness to persist. China and Hong Kong, do you expect them to turn around in the next 12 to 24 months in terms of reversion?
In terms of reversion, I think it will potentially narrow. But this to -- if you talk about Hong Kong itself, I want to see whether if the ForEx has moved against China yuan to -- it means Hong Kong is less expensive, then I think you will see better tenant sales. You will see potentially better tenant sales and there will be less -- better reversions. Right now, I think there's some leakage to Shenzhen in terms of consumption or overseas, because the dollar is strong, hopping on a plate to ABC next to themselves, which is be it Taiwan or Japan is a very common thing. Even on a short weekend its consumption is potentially still happening, but maybe not consuming in Hong Kong. So when there's a potential change in the currency, then I think the outlook could be better for retail. Right now, Hong Kong dollar is very, very strong. So tenants actually educate me that they are still spending, but just spending outside. So they can draw the conclusion in terms of the ForEx having an impact on -- having -- being a driver to that.
So if you talk about when are we -- rental reversion, I have to look at where all the old leases that we signed before is less than 10%, those will go down. What I'm seeing now is the second round of those that have renewed one round after the COVID. This quarter, it still looks like it's holding up in terms of -- it's not breaking another round. So the rental reversion that you're seeing negative is predominantly due to One Visa, which is a supermarket that was done way before -- that was done before COVID. So that definitely came down.
What about China?
So we don't -- for 2 reasons, we don't expect China to reverse the rental reversion profile anytime soon. First and foremost, the economy still remains fairly weak in terms of demand for spaces, we are not seeing significant improvements. But on the -- not just on the demand side, on the supply side, there is quite a lot of issues in Shanghai in particular. There is a lot of supply, both in the office as well as the BP space in Shanghai. If you go and check some of the statistics over the next -- this year, plus 2 more years, the amount of supply in the Shanghai market will be more than 20% of stock. So there's a lot of space being built up. Some of that is due to the fact that a lot of these spaces were delayed from COVID period. So all that's coming into the market at the current moment.
The supply plus the weakening demand has actually caused rentals to fall quite a lot. Some -- we have been hearing of a 30%, 40% reductions in rentals in the Shanghai BP market. So that will definitely flow through to our numbers. Luckily, some of our leases were still on a slightly lower base. So the rental reversions aren't so negative. But as time progresses and we come through to the leases that were signed at higher rentals, the rental reversion is likely to widen rather than narrow.
China, I think the focus is on preserving occupancy. The supply on the ground is still there. Protecting occupancy is key as opposed to having a very, very long downtime and to find new tenants. It makes more dollar and sense. Now like last time I mentioned, the rental reversion is always a good signal. But if you were to say, Sharon, are you going to keep this space vacant for 6 months and go for a 2% rental reversion? No way. I would rather take the 2% to 5% cut as opposed to a 6 to 9-month downtime. 1 month -- 1 out of 36 is about 3% to 4%. So if you take 1 quarter down, it's about 10%. What is the likelihood of a 10% down or 1 month vacant? Very high. Because in office, you do not match the expiry to the start that beautifully.
So what you are seeing, if you want to have a gauge of where revenues will go, 2 components. What you are seeing is a rental reversion. The other component is downtime. Now when we manage, we always see what is the potential downtime that we need to hold it vacant. If I'm just after a positive rental reversion and to wait out for 9 months or 6 months, it doesn't make sense on a cash flow basis and a return basis. So I think just a matter of putting that into perspective.
On Japan, can you share mBAY POINT and Makuhari BAY POINT, what's the committed rent? And also what's the actual occupancy in terms of rent that's paying for the quarter?
So for Makuhari BAY POINT rentals, we are generally signing in the about JPY 10,000 to JPY 12,000 per tsubo rate. Occupancy at the building now is about 80%. Makuhari Bay Tower, the former Seiko Makuhari Building, that building has rental slightly lower. We are running at about JPY 9,005 per tsubo range, but the occupancy is only about 26.5% because that's the space which Seiko retained at the building after the termination of the master lease.
And just one last question on capital recycling. Does it sound like your priority is AEI at Festival Walk and divestment and lastly acquisitions?
I think it all has to come together and see whatever that is available in the market. If I put the current market out there and evaluate and say, would I be actively looking at acquisitions today? I think like I mentioned, we have to be cognizant about the spread versus the borrowing cost to be material enough for it to make sense to the portfolio, which is presented by a few sectors, not all the entire -- not all the markets. So that's one.
Now the capital recycling, like I said, it is part and parcel of our job to make sure that if the 2 key properties of ours, which is synonymous to us, is VivoCity and MBC. The rest, if it makes sense to recycle, we would. So it's not that we are accelerating or decelerating. As it will go through every year, we will consider. Like I mentioned, we are not going to be pushed to do any recycling due to any form of gearing issue, which we don't see that we are in any. We're in dire straight that we need to do anything about it.
So if you are saying that are we going to be doing any more divestment due to our certain capital structure, I don't think we need to. We are healthy enough. So our capital structure is relatively strong. So expansions have to be careful in short. Divestments, if and when it comes, we'll evaluate. But the 2 costs that is VivoCity and MBC is not in our books to consider.
Next on the line, we have Derek from Morgan Stanley. Derek?
I just want to follow-up on your comments earlier on Festival Walk. I think you mentioned that you've outperformed the Hong Kong retail market in terms of tenant sales. Just looking at some of the numbers that came through, I think Hong Kong year-on-year tenant sales are -- retail sales are down maybe about 10% so far last couple of months. Just looks like Festival Walk may have underperformed a slight bit. So just wondering what's the gap over there?
Derek, according to our own internal estimates, I think for the month of July and August, average daily basis, compare that to the quarter before, the Hong Kong retail sales is actually minus 3%. Whereas for Festival Walk, if you look at it 3Q versus 2Q, we are up 3% for tenant sales.
Sorry, 3Q?
We are talking about 3Q versus 2Q.
Like-for-like.
I mean, year-on-year.
Year-on-year, I think it's down. It's down...
Like it's underperformed?
No, no. Generally, we are in line with Hong Kong retail sales performance. However, I think if you look at it from the 3Q versus 2Q perspective, we are actually outperforming Hong Kong retail sales numbers. That's all.
Understood. Yes, it just seems that the year-on-year performance seems to be a bit weaker compared to the overall market.
Okay. If you look back to our -- so that means that is -- what has dragged down is previous quarters as opposed to the current immediate quarters. The current immediate quarters are doing better than the retail sales in that, which is a better sign for me as opposed to previously I do better and now I'm worse. You know what I'm saying?
Okay. In that case, are you able to share, I guess, the occupancy cost for Festival Walk?
20-ish. Yes, all in that 20-ish.
Low-20s?
Low-20s.
Okay. And how does that compare to pre-COVID or it's also...
Pre-COVID was slightly shy of 20. Yes, slightly shy of 20 -- above 20. They are both in above 20.
Okay. So they are already above 20?
Yes.
Okay. Got it. And just lastly, I guess, you made your sounds clear on top-ups, but what about buyback, especially since you already have that mandate back in July?
Your question is on share buyback. And your question being, what about the share buyback?
No, question is, why you are doing share -- actually carrying out share buybacks, especially since you have that mandate back in July?
I'd say, our mandate is still there. Right now, I don't -- not in our plans, but can be activated.
Yes. Just to clarify, I think what Sharon has said that the share buyback mandate is still in place, but currently, we do not have plans to actually use it.
So Yew Kiang from CLSA, it's your turn. Yew Kiang?
Yes. Just on the Japan properties, talking about divestments, is there any recent transactions? And what are the kind of cap rates that's done in the Makuhari area? And then second question is on tenant sales. When can we expect improvement in tenant sales in the positive region for Vivo and Festival Walk?
So for Makuhari, we are aware of one transaction, but the transaction details were not disclosed. So we don't know what the cap rates and what the transaction pricing is.
Okay. Just maybe a follow-up on that. Should we also expect further downward revaluation for your remaining Japan properties?
Out of Makuhari, I think our -- the best -- the rest of our non-Makuhari is relatively stable.
Okay. And then tenant sales, Vivo and Festival Walk?
There's no sales in office. You're talking about Festival Walk tenant sales?
Yes.
Okay. I think it was down to -- consumption needs to come back, right? And we do -- I think there's a lot of write-ups and a lot of people moving to -- not moving, spending and consuming out of Hong Kong. Like I said that the ForEx is -- will be a good trigger. When ForEx moves, Hong Kong dollar less -- not as strong compared to today, consumption will be definitely tilted more towards Hong Kong as opposed to out of Hong Kong.
Then how about Vivo? Is it also a ForEx issue?
I think Vivo, it was only 1 quarter, the previous quarter, only previous 1 quarter due to I think it's holidays more than anything else. Then this quarter, we shut down a lot of the kiosks, which is called 0 sales that will be recorded that we are doing all the work that continue to -- the worry is not warranted so much for Singapore. Hong Kong, I think there is still some consumption out of Hong Kong, especially to Shenzhen.
Okay. But we also have another school holiday coming up soon...
I mean, there's a few indicators when you run a retail. I mean, you see a number sharing, your sales coming down. I will tell you, sorry. If you look at it, quarter-on-quarter it is better. Preceding quarter is better than -- this quarter is better than preceding quarter. Second, I have shut down AEI, due to AEI. So that's why it's not in the denominator at all.
Now am I really concerned with Singapore retail? Another indicator is the interest level for our units. It's definitely way stronger compared to Hong Kong. I think we have a good sense of when we manage it. So am I anywhere worried about Vivo? I would say, no. I think Singapore has done well in terms of opening its borders early and I think the tourism numbers has also come to a certain level and activities are no less. The drop in traffic could potentially be due to the transient.
If I look at my sales, that's already crawled back where 1, 2 years ahead, I mean, 1, 2 years ago, we have already surpassed pre-COVID. So that means that the sales itself is not anywhere near lacking. Quarter-on-quarter, this quarter is better than last quarter and definitely it's better than this. The only quarter that was down was last quarter. So I am not concerned on the performance of VivoCity. And when we start continuing to do our enhancement work, you will see that we will be creating more value through our entire Basement 2.
And if we are talking about spending about SGD 30 million, SGD 40 million, but the vibrancy that we will be creating at the entire Basement 2 will be very, very different. We are talking about converting, about using unutilized GFA and converting 60 car park lots, increasing kiosk from 20 to 27, thereabouts then plus additional space of about over 1,000 just at Basement 2, which is our most prime block. We are not stopping. I think that is a good indication of our confidence level in terms to widen -- to lead ahead.
So if you see us stopping, slowing down, then you'll be concerned. We are not stopping. We still have a whole set of things that we want to do to VivoCity because there's no end into asset enhancement. After we finish this, there's other things that we also want to upgrade. For us to start -- continue blocking money, it means it's churning for us. So from prospective outlook, the Q is still there. There's still -- there's a lot more foreign banks, SMB, especially trying to come in. Then from our stance of growing -- injecting more -- investing more into our assets, I think it's quite clear that our confidence level is very, very high.
Just to take one question from Helen from online. She's asking, for MBP currently, the occupancy is 80%. Do you expect this to change or how is it going to change going forward?
So thanks for the question. There is some risk that the occupancy could come down. I mean -- so prior to the expiry of the master lease at MBP, the master tenant as well as the sub-let took out about 50%-odd of the building. When that master lease expired, more than 80% of the underlying leases continued with us. Now whether those tenants will continue across -- after the expiry of their current leases, I think that one still remains to be seen. We do have 1 or 2 tenants -- 1 or 2 of the sublessees who have already informed us that they will be terminating their leases. So there is a little bit of down in occupancy that will come across over the next 6 months or so. Then for the remaining sublessees, when it comes to the expiry or comes to the point that they can terminate leases, they will inform us if they are leaving.
Okay. I think we have 2 final questions from Rachel again. Rachel?
Just housekeeping. I think for MBC, could you give us an update, how many percent of backfilling have you done for the Google space, the Unilever space and also the JB space? And lastly, just some color why the Pinnacle Gangnam tenants suddenly just left?
So I'll take those one-by-one. For Google, we are still -- the space is still being marketed. We are talking to currently about 2 tenants for -- 2 or 3 tenants for potentially taking up part or all of the space. That's the same for the JB spaces as well. For the Unilever spaces, we have filled about 70% of the space currently. And so we have about 1 floor and a little bit left. So we are still marketing. We are in discussions with a number of small tenants for that top floor. And for the larger 1 floor space, one tenant in discussion at the current moment. So for CPG...
How many square foot.
No, she was asking about the drop in occupancy. So the drop in occupancy was largely due to 1 tenant giving up space at the building. The tenant had some legal problems. So they were looking to -- we actually pre-terminated that tenant before their legal problems caused us more problems in the space.
Okay. The rent, is it under rented or is it close to market rent?
Rental, that particular lease was signed a few years ago. So that one is still a little bit under market.
Thank you, everybody. We are very well aware of the timing. It's close to 8:00 o'clock. So thank you again for your time and participation in this call. If you have any further questions, feel free to reach out to the Investor Relations team. Thank you, and we wish you a great evening ahead.
Good bye.