CapitaLand China Trust
SGX:AU8U
CapitaLand China Trust
CapitaLand China Trust (CLCT), a prominent player in the world of real estate investment trusts (REITs), has carved out a distinct niche by deftly navigating the dynamic and often unpredictable Chinese real estate market. CLCT primarily focuses on income-producing real estate assets, with a diversified portfolio sprawling across retail, office, and industrial sectors in the key cities of China. This strategic diversity helps CLCT tap into the burgeoning urban middle class, driving demand for commercial real estate across the food and retail sectors. The Trust's investment philosophy leans on acquiring well-located properties with high growth potential and stable income, which they then manage adeptly to maximize returns. By leasing spaces within these properties, CLCT creates a consistent revenue stream, ensuring steady cash flow and income distribution to its unit holders.
Operating within the intricate tapestry of China’s urban landscape, CLCT capitalizes on the growing consumer and business activity in cities like Beijing and Shanghai. The trust's experienced management team actively cultivates strong relationships with tenants, ensuring high occupancy rates and long-term leases—key elements to its business model's success. Additionally, CLCT embraces a proactive asset enhancement strategy, investing in property upgrades and developments to boost appeal and value. This not only attracts top-rate tenants but also enables increased rental rates over time. The combination of geographical diversity, strategic asset management, and a focus on consumer-driven sectors positions CLCT to continuously navigate and weather the complexities of the real estate market while striving to deliver value to its investors.
Earnings Calls
In its latest earnings call, CapitaLand China Trust reported a 3.4% decline in revenue year-to-date, driven largely by weaker logistics and business park sectors. However, retail revenue improved by 1.6% on a comparable basis, supported by asset enhancement initiatives. Occupancy rates have stabilized near 91%, with expectations to reach 98% soon. Management anticipates a low-single-digit negative rental reversion and projects a stabilized occupancy of 80-85% for business parks. Cost of debt remains robust, expected between 2.5% to 3.6%. Overall, management is focused on capturing the rebound in consumer sentiment spurred by government stimulus measures.
Hi. Good morning, everyone. Welcome to CapitaLand China Trust 3Q 2024 Business Update Call. I'm Nicole, IR for CLCT. I have with me today, Tze Wooi, CEO; Gerry, Deputy CEO; Joanne, CFO; and You Hong , Head of IPM.
Thank you all for joining us today. For the next hour, we will start with a brief presentation to provide an overview followed by a Q&A session. Once the presentation concludes, we'll open the floor for questions. [Operator Instructions] I'd like to hand over the time to Tze Wooi, please.
Thank you, Nicole. Good morning, everyone. Thank you for attending CLCT's 3Q business update. I know this is a very busy earnings season for everyone, so let me take you through the main business highlights in the next few slides before we open up for interaction. I mean all of you are very familiar with CLCT as a China long-term play, positioning ourselves to capture the China's domestic consumption and the technology and innovation sectors.
So building diversification of our portfolio mix to ride the market cycles have been our focus. So for this year-to-date 9 months, our biggest asset class of retail is showing more relative resilience vis-a-vis the logistics and business park segments, as you can see. For the 9 months, our revenue is about 3.4% lower, largely due to the lower contribution from the logistics and the business park portfolio.
But this year, we also have the absence of the contributions from the 2 malls that we have exited, mainly Shuangjing and Qibao. But at the same time, the retail is being offset by the improved AEI performance from those malls that we take in 2023. So on a comparable 9-mall basis, the revenue for the retail increased by about 1.6%.
Extending to the net property income, a similar picture of 5% below year-on-year, again, lower contributions from logistics, business park as well as the exited malls. At the same time, we see a lot of churn during this period, so lower effective occupancies and also for some one-off property tax that we used to receive, especially for business parks, these are absent for this year.
At the same time, if you look at our retail, due to the AEI, our top 5 malls as well as the comparable 9 malls have been moving in the right direction of growing year-on-year. Overall, occupancy is healthy at above 91% over percent. Shopper traffic and tenant sales continue to trend on a positive trajectory.
At the capital management side, we're maintaining very stable cost of debt through our very active measures, maintaining a relatively high fix of 76% and also pushing up our sustain-linked loans in the meantime.
If you look at the operations, breaking down the retail and the business parks and logistics, largely, you can see the occupancy for retail being resilient, especially after our AEIs and our proactive lease management have really enhanced the resilience.
Occupancy has moved back to a normal state of close to 98% as a portfolio, and several malls are almost full occupancy. For the 9 months I mentioned earlier, our traffic and sales consecutively, we are showing quarter-on-quarter improvement, especially led by the AEI malls, that's very clear.
In terms of 9 months, we strip it out, I would say 1/2 tend to be stronger, and the 3Q data point starts to be trending a little bit softer, generally in line with what we see in the marketplace because of the consumer spending still being cautious, which brings us to why we see that the Chinese government has been pushing through a series of very targeted stimulus to boost the economy.
So if you look at what they've announced in September, October and likely next week in November, I think there's a lot of push to ensure that the economy has been stimulated, fiscal side and monetary side. And I think they overall have a target to meet their full year target.
So I think with all this, especially what we are seeing in the monetary easing, so these are areas that we see that will be positive. And as the consumption is being boosted, as the household income is being boosted, I think naturally, sentiments will improve and this will benefit our retail sector.
On the business park side, I would say largely, it is relatively stable. In the third quarter, we lost one anchor tenant in Xi'an. We are in the process to backfill. We advanced negotiation to close some of the quick anchor spaces that will push up occupancy to closer to 85% by year-end. So this is something that we're working on.
Hangzhou, I think we have guided throughout the year. I think we are seeing more lease turnovers. As we sign new ones, we also had some business model that's trading off. So all in, we are seeing a little bit of that stable occupancy despite bringing in new tenants. Xinsu continues to be stable, and we are seeing good leasing demand at that sector.
Logistics, we do break down the 4, I think the 3 logistics have been progressively moving in the right direction. We have pushed Wuhan and Kunshan to almost full occupancy. And as we speak, period end for Chengdu, we cut off at 81%. But as we speak today, the occupancy has also moved up to the 83% level.
At the capital management side, I think we have guided that we'll continue to execute our strategy to increase the natural hedging, and you see us increasing the RMB-denominated debt as a portion of our total debt book. So in October, we also issued a CNH bond at a good interest that will help us to refinance the Sing dollar debt down, extracting savings along the way.
And as more of the renminbi easing cycle begins, I think we stand benefit to enjoy more of these rate cuts because of the early actions and positioning efforts that we've done. The last time we met you, I think we guided in 2022, our renminbi was about 10%, '23 is about 20%, and we are moving to 30% this year. So as at September, we've already moved it up to 31%. And with the CNH bond, we are pushing up to 35%.
So I think we are accelerating this proportion to ensure the capital management side, we are capturing that upside. Along the way, I think the [ sustainability ] loan has also been pushed up, which I mentioned earlier. Happy to share that the GRESB results is out, and we continue to maintain the 5-star rating. And along the way, we have also moved our portfolio buildings to 60% in terms of attaining the LEED Gold certification.
At the balance sheet side of things, I think we continue to hold our debt at the same level by bringing cash back from onshore to reduce the debt offshore, maintaining gearing at 41.6% between these 2 periods, largely driven by the RMB weakness. As we closed this quarter, RMB is at its weakest point, both in terms of the third quarter performance as well as the September balance sheet reporting throughout the listing of CLCT. So that itself will eat into a little bit of the gearing number that we see.
Average cost of debt has been maintained. I think we guided that we are looking at, this year, about 2.5% to 3.6% range. I think you continue to see us actively managing the cost of debt within that range. Other financial metrics continue to remain stable.
In terms of our debt maturity profile, we have completed all financing for 2024 and also have secured early commitment to refinance the 2025 debt tower. So in a way, we have completed all the BAU in terms of refinancing for the next 12 months.
I already mentioned, if you look at the doughnut on the right, this is something that we will continue to diversify, our funding sources, with an emphasis to tap more of the RMB product that will give us the competitive cost of borrowing, such the overall loan book can be more competitive in terms of the financing costs.
I think this slide, you're very familiar. We continue to be one of the REITs that is most diversified and less exposed to any tenant concentration risk. During this period, we continue to advance in those sectors that we are seeing consumer demand. F&B, we are increasing the NLA mix in terms of the overall and also the GRI, moving it to 27%.
At the same time, you look at where the consumer spending seen in our malls, we continue to capture more of the lifestyle, the infotech. This is something that we see a lot of pivot towards supporting national brands, so this is something that we are actively bringing on board.
At the same time, at the business parks, you see us focusing a bit more on sectors that are supported by all of the Chinese government's push for technology growth. So you see us bringing in more enterprises that are in the electronics, in the engineering and also in the infocom. Overall, our top 10 tenants contribute about 9%, while the top 1 tenant is about [ 1 over percent ]. We'll continue to be fairly consistent, looking at year-to-date.
Moving to the retail, I think I've mentioned earlier, if you look at the 9 months, the traffic and sales, largely driven by what the AEI malls have completed. So I think this is a large push towards improving their enhanced offerings, and you see footfall coming back and the kind of new concepts and brands that we brought in have also attracted spending. Generally, we see spending oriented towards more value F&Bs, lifestyle services, and I mentioned earlier, the IT electronics, et cetera.
If you look at the Golden Week, I would say, generally, footfall have come back. People are traveling and going into malls to shop, although we also observed that people are a little bit more cautious in what they spend. The general ticket item headcount in our mall have tend to drop down a little bit and this is, anecdotally, quite consistent with what we are hearing from the retailers. I think they have to give a little bit more discount and value in order to capture some of this spending.
I think for retail, I mentioned occupancy. If you look through, aside from our 2 biggest malls in Xinnan and Aidemengdun, I would say largely the rest of the portfolio has trended back to almost at 98% to 100%, which is a healthy level. And if you look at Xinnan and Aidemengdun, they are our 2 smallest malls in the portfolio. In terms of NPI contribution, they are like less than 5%, 6%. So I think we are really trying to deemphasize the smaller malls, looking for opportunities for us to monetize and exit some of this less impactful and dominant assets.
In terms of 9-month reversions, this is on a duration effective basis. I think retail for 9 months, we are reverting at about negative 1%. And if you strip that negative 1%, I would say more of the negative's coming from the new tenants that we are cutting into the malls as a concept. So that number, it's closer to the negative 4%, but balanced off with strict renewals that we are seeing that is slightly on the positive side.
So overall, as you see us retaining more of our tenants, we should expect rental reversions to monitor it and have less pressure to be on the negative side going forward. But as we speak, I think reversion is always, the number I mentioned to you, it's just a guide. What we are trying to do is really to strengthen our model to capture the flow of the business and be competitive. So I think that's more important to run that long-term business.
Occupancy costs, again, I think if you look at that, it has also been improving from the years of deep COVID across 2022, '23, '24. Things are normalizing back to a healthier state, where we are focusing, first and foremost, to improve the traffic, improve the sales, and I think the rent would then, in the next cycle, be able to catch up.
I think these are some of the effort that we've done in the third quarter. So in third quarter, if you look at Xizhimen, there's a bit of that number, downtime effect both in terms of sales and NPI. But once this is completed, yes, completed by now, so the contribution will come in, in the fourth quarter.
Moving on to the business park side. Again, I mentioned, if you strip out the Xi'an Ascendas Innovation Towers, where one anchor tenant left us in the third quarter, we are in close negotiation to fill it up with another major anchor tenant.
We are trying to consolidate some of these big MNCs into our park. So the conversations are converging, and we are hopeful that by end of the year, we are able to bring them in. And once they're in, I think it will move the whole portfolio to around that 89% level in terms of the occupancy, which is healthy if you look at where the relative submarkets are trending.
Each of our parks, we are responding and addressing them quite differently. I think Xinsu, I mentioned, steady, capturing the demand in the sectors that we want, and we continue to see healthy signings. And some of the product that we have in Xinsu is scarce, and therefore, it also creates a scarcity demand.
I mentioned already on Xi'an. So moving to Hangzhou. I think if you look at where things are, I would say, in China really, business activities are warming up a little bit more than what we are seeing. Although the activities level have picked up, I think the rent continues to be a little bit soft because of that demand/supply imbalance. There are more landlord chasing a limited pool of tenants, so I think we have to be a bit more competitive. And as we prioritize stabilizing the occupancies, I think rent is something that we have to be a bit more practical in the current market.
Moving to logistics. I think I earlier mentioned, if you look at where things are today, aside from the Shanghai, which we are really doing a deep dive to 6 to 12 months' time to reevaluate what we want to do with this, the rest of the malls or rather the rest of the logistics assets have moved to a level that we are comfortable by now. I think Chengdu, I just mentioned, as at September is 81%, but right now, it's already in the 83% level. So generally, it's moving in the right direction.
All of you are also very clear about our focus. I think the last few years really is about extracting value through our assets, looking for opportunities to unlock and monetize, with a continued focus to improve the quality and also to improve our balance sheet strength. I think this is going to be the main focus as we look at other opportunities.
And I think this slide shows you what we have been, in a disciplined manner, programming the AI opportunities, staggering the malls and making sure that one is completed in a staggered manner that income starts to contribute. Again, looking at where we are now today in the fourth quarter, there will be further opportunities for us to unlock value from the major anchor spaces.
We continue to look at how the anchor spaces are performing. So for those weaker ones, we will take some further actions to recover space. I think these conversations are happening ahead of the natural expiry. And I think with that, I think we can position the malls longer term to be more competitive and also drive the rental new productivity.
So to conclude, I would say, I think all of us know that China, I mean, the last few years in terms of business conditions, in terms of the consumer sentiments, have been affected. So these short-term challenges continue to be there as we navigate, but the good thing is I think if you look at what I mentioned earlier, a series of government policy actions and acknowledging that the economy needs to be more prime, bringing on more fiscal and monetary measures and more targeted in terms of making sure the household income and the consumer and business confidence come back.
So I think these measures will take some time for them to filter down to the real business, but generally very positive in terms of the government already acknowledging and putting in specific measures to make sure the economy confidence comes back. So in terms of what we are managing, in terms of our own portfolio across the 3 sectors, I think we are well aligned with all the key policy objectives.
So in terms of retail, continue to strengthen our AI measures to make sure that when consumption confidence come back, we are among the first mover to be able to capture that. And I talk about business parks, different assets we are targeting differently. In logistics, we are moving up in the right direction in terms of occupancy.
So I think with that, I'll just open up the floor for interaction. Thank you.
Thank you, Tze Wooi, for your presentation. Now let's proceed to the Q&A segment. We have the first question from Terence.
Just wanted to ask more on the business park outlook. Could you give us a sense of what are you expecting for business park reversions going forward? How are you looking -- would you be able to hold occupancies, especially in Hangzhou? And what's the expected downtime from this backfilling of the tenant in AIT?
Okay. So in terms of AIT, I think we are trying to secure the commitment from one big MNCs into the park. Looking at the time line, I think we should be able to commit them in by end of the year. So that is the target. In terms of when they can contribute income, I think that will be some time away because for such a big anchor space, we do have to do some pickup, et cetera. So more likely window where the income will come in will be the second quarter of 2025.
So with that, I think if you look at Xi'an, our combined occupancy will move up to around the 86% level, so that's where we are guiding in terms of committed occupancy. Hangzhou is where, I think, although we are signing quite a lot of incoming leases, but it's always been negated somehow by the nonrenewal. So I think our strategy is really to also attract some people who can take up more big spaces at one shot rather than to spread too much of our leasing resources across many, many small ones.
So I think there will be some kind of leasing strategies that we've got to pivot a little bit. All in, we are guiding that for Hangzhou, we should move the combined one to closer to the 85% level, 80% to 85% level. That's where we are in. Suzhou, I think, will be stable, I think stable at 90s. So I think, largely, this will be where we are thinking in terms of committing the business parks.
On reversions, I think for the 9 months, largely, if you look at Suzhou, continue to be trending positive on a low single digit. Xi'an AIT is turning negative, for obvious reasons, because we have to balance the occupancy. Hangzhou, also in the negative. So overall, I think the outlook for business parks as we prioritize occupancy, I think in terms of reversions, we are probably looking at the low single-digit range for our outlook.
And maybe looking forward into 2025, into next year, should we expect this to sort like stabilize? Or is there concerns that this is could worsen from here in terms of occupancies and reversions for the BP?
I think in terms of occupancy, I think the target is really to stabilize. Earlier, I mentioned Xinsu continues to be in the 90s. Xi'an, with what we are trying to do, should move us closer to the 86% level, and for Hangzhou combined, we should be looking at 80%, 85% level. So largely, I think the occupancy will be stabilized around that range, but where we think we have to be a bit more practical in the current market where the asking rentals a little bit more soft.
So I think the negative reversion is likely to continue into the 2025 outlook. So I think in terms of balance sheet, that's how we are trying to do. And also going back to what I mentioned earlier, I think the key focus in this current market is really to be able to retain some of our tenants. I think we have a slide to say that if you look at the amount of tenants that we are retaining, this number is about 70-30 for business park. So with more retention coming in, the reversions are less negative. But when you need to bring new one in, then chances are you need to [indiscernible] the retention.
Okay. Yes. So quite similar to business park to retail. If you look at the retail retention, it's about -- over here. I mean if you look at the retail is about 60-40, but in terms of business park is about 70-30, so I think the less pressure is on retention in terms of the negative reversion. More when you need to bring people in, you need to incentivize a bit more.
Okay. That's great. Maybe I can ask one more set of questions on the interest costs. Very, very surprising on this 2.9% CNH bond. How much more of that could you do going forward? What's your outlook on interest costs? I mean, you have given the guidance for this year, what's that -- 3.5% to 3.6% for this year. But what's the outlook for next year?
I think as we actively manage our debt book, there are some plus and minus, right? I mean we all know that the REIT, generally, we are on high fixed for the last few years, and some of those high fixed hedges are going to roll off. As they roll off naturally, the repricing in today's context is still going to be a step up vis-a-vis what we have entered, say, 3 years ago.
So that part is something that will move the cost of that higher. But at the same time, because of the early actions that we have already taken to shift more of the R&D and to capture some of this lower cost of funding, that's going to help us neutralize. And the other 2 aspects would be likelihood the rate cuts will come in, in 2025. And if you look at the R&D side, it's quite clear that the LPR are on a leasing cycle.
So on the neutralizing bucket, I think we are still guiding that our total cost of debt to be roughly in the same 3.5% to 3.6% range as we approach 2025, all things constant, right? I mean if we can have a little bit of that portfolio reconstitution where we monetize some assets and the proceeds can be used to pay down our gearing, that will help to advance and improve the total funding cost.
Thank you, Terence. Can I pass the time to Geraldine, please?
Maybe just moving on to Terence's question on capital management, I think the 3.55% has not reflected our new onshore bond, right, which came into effect in October 2024.
That's right. That's right. Because we are at period end cutoff and looking backwards. So the same hedge of the 2.9%, where we will be using them to pay down our, say, high 3%. In terms of the cost of debt, there will be an improvement going forward, yes.
Okay. So if you reflect that in, the interest cost will move the needle for the cost of debt?
It's not going to be a big needle. I mean if you look at -- this is going to be an average trend. I think more will be seen if you were to allow the CNH bond for the whole duration of 2025 that will be a good savings for the debt that we are replacing, right? But for the fourth quarter, I don't think, just because of the CNH bond, is going to disturb the 3.55% materially because we're looking backwards, always that. [indiscernible] of debt.
Okay, okay. Yes. Cost, only 3 months impact, right, from this?
We do expect that because of all these, the total financing cost for the year should reflect that positive savings.
Okay. Okay. Sounds good. Yes. So maybe just one more on DPU for second half. I think rents have weakened through the year, but interest cost has remained quite stable. So how should we be seeing your second half DPU as compared to the $0.03 delivered in first half?
If you look at what drives DPU, I think the biggest component will be NPI, right? So I think that is the first step we look at. Second, in terms of DPU, it's also impacted by the RMB. You mentioned, I mean, the NPI, the RMB translation conversion back to Sing dollars.
If you look at where the interest and funding costs are held, I think that is being held steady. In fact, could be slight improvement and potentially any other leakages like taxes. So I think you start from that angle. I think the [ 2 half ] where we are seeing, I think the business park is going to be half on half. I think the business park is going to see some weakness because of the income [indiscernible] at CI.
I can just slip in one more on the retail trading performance. I think it is very strong, surprising thinking outlook that travel normalization amongst the Chinese will see some leakage on essential spend. Maybe just some color on this say, outperforming trade sectors or some -- any guys that benefited directly from the recent policies?
I think in terms of where our malls are positioned, they are always doing a very domestic catchment business. We are not like some of the Singapore malls that you're very familiar with that is attracting a lot of tourist dollars. So I think that's the first point to be aware.
Second, I think if you look at where the positioning of our malls and the kind of post AEI, you are seeing us orientating our trade mix to areas or sectors that we are capturing the spend. I think this is where we are able to push that [indiscernible]. So if you just -- now you ask me what are the trade cats that are seeing improve, I think F&B is a clear segment that we are seeing in terms of sales.
Even in terms of the rent, I think this is a clear situation where the F&B is in demand. I think this is an area that we continuously refine, we bring in what is trending, and by bringing them in, you capture spend. So I think this is something that we clearly see moving more emphasis towards that.
The rest of it, there will be some brands that naturally, we have to attrition. And we do see a little bit of a shift, especially in the electronics, the lifestyle gadgets, IT. People are shifting towards supporting more national brands. So this is, again, if you look at where we have been able to, these are the national brands that are seeing some improvement in our sales.
Other than that, I think we -- if you look at the retail trade cats today, I mentioned to you that education has always been important, I feel, as a content in the mall because of where the Chinese families are orientating their spending towards the children. So education, hobbies, interest. This is an area that I think still have room to grow.
The last 2 years have been difficult for the education operators, but we do see perhaps improved signs that things are a bit more normalizing back, and I think there's scope for us to improve this area. And once you move the education from the 1-plus percent to 3%, I think there will be more offerings, and I think that will also help to bring in more people family-oriented spending into our mall.
Services continue to be also showing year-on-year improvement. I think that's just really a reflection of today's consumers when they go to physical spaces, the current experiences that they want to enjoy and the kind of spending there, where they spend a wallet on, I think we continue to be very active to tweak all these kind of trade cats and account brands and concepts.
Leisure and entertainment has a bit of difficulty because of lack of good films released. These are very event-driven, very seasonal-driven. If you have a big blockbuster entertainment, this sometimes just drives a lot of activity. So I think for these 9 months, this is also quite quiet. Beauty and health care is, again, something that people continue to pivot and pay more attention. Healthy lifestyle, gym. So these are areas that we [ need to treat ] the content within our mall.
Can we have [ Jonathan ], please?
My question relates to the logistics park business. Firstly, you mentioned some improvement at Chengdu. Could you elaborate on activities there? And I missed the number you mentioned, you expected occupancy to improve to what number?
And then secondly, could you update us on the repositioning of Shanghai Fengxian Logistic Park? Have you completed the reevaluation? And what do you intend to do over there?
I think for Shanghai, I think we are still in the period of studying deeper whether a few choices that we are exploring and keeping an open mind to be more flexible and agile in this current market. We are, at the same time, trying to improve, in terms of its leasing conditions, potentially signing new leases down in the shorter term that people can use the space very quickly.
So this is one track that we are doing. The other track, we are really restudying the scope, and hopefully, we can customize some of this building to bring in a tenant that is willing to use the space on a longer WALE, but in return, we have to spec it up for them. So I think we are still in the midst of evaluating this. While short term, we are signing some short-term leases.
At the same time, obviously, I think we are also looking for exit options if there's good monetization possibility on the table. The first question relates to, I think, the logistics in turn. I think the terms to -- I think the Chengdu logistics parks in terms of location. It's actually very near to the Chengdu Shangliu domestic airport, and I think if you look at the context, it's something like near Changi Airport and Changi Business Park, that logistics kind of feeling where they have a big zone.
So I think this is a kind of internal supply chain movement, last mile delivery nearer to the consumer market. So these are some of the spaces that we are leasing up towards more consumer-related 3PLs. So that number continues to be there in demand. We are projecting closer to the 85% mark by the end of this year. You Hong, you have any more color you want to describe for the tenants that we are seeing some demand?
Yes. In the logistic park, we have 3 warehouses. One number is occupied by a cold chain operator, and the rest is -- actually, quite a number, it's 3PL and some of the serving the food as well as like the consumer-related products. So I think they are generally -- when we visited recently, it was quite healthy. The business vibrancy is there. So I think we are hopeful that the demand would come, yes.
Okay. For Shanghai, when you say to customize the building, do you mean customized to a non-logistics for a portion of the logistics park?
I think we stand open to possibilities on how we want to strike a deal with the end user. I mean if the end user is someone with a little bit of industrial manufacturing kind of business model, that is something that we need to evaluate whether we can accommodate in terms of specs what they need. This park, when we bought it, it's more for 3PL, but the 3PL in the current market in terms of where they used to be servicing, that demand has sort of dropped off.
It's also closer to the -- [indiscernible] near to the Yangshan Port, right? So that is quite a port that the freighters, they are moving ins and outs. So that demand has sort of like tapered off in the last 1, 2 years. So that's why we lost that 3PL business. So as I say that we studied the repositioning, we are open-minded on various options.
Okay. And lastly, with the recovery that you're seeing in Kunshan and Chengdu, can we infer that there is some broad-based recovery for the logistics business? Has the business bottomed and recovering?
In terms of occupancy, definitely, you already see -- if you look through this slide, I mean, we have moved the occupancy from Chengdu from the 60s to today the 80s. Kunshan and Wuhan are almost full. So I think that's the first step that we want to address in terms of this business, right? So in terms of occupancy, definitely if you compare half-on-half, I would say then things should be improving.
But where we see things a little bit more volatile is at times, I think the business model of the tenants, I think that's a important situation. Sometimes the business model is no longer competitive, they may leave us and therefore, you need some time to replace them. And the current market is actually the rental is still soft.
So that's what you see in terms of logistics parks, our negative reversions is more pronounced. So I think you can work out your math in terms of occupancy, half-on-half, things should be bottoming and improving, rent softer than where we were collecting versus 2, 3 years ago.
Thank you, Jonathan. Can we have Vijay, please?
I have 3 questions. Maybe I'll take it one by one. My first question is in terms of stimulus. I think a lot of the stimulus came after the results, right, in the early October part of things. Based on your ground discussion, have you seen any of this resulting in a sustained momentum for any of the segments like retail, logistics and business parks, and how do you see this impacting moving forward?
I think first and foremost is we like the fact that the government have acknowledged the situation, and they have since end September come out with a series of policy stimulus, continuing the momentum to engage and to be more targeted, especially with some industry and market feedback. So I think that's the first positive thing that we are taking away.
How soon this real stimulus can filter down, I think we have to be taking a more pragmatic approach. I don't think this type of things can be instantly overnight. I think sentiments are generally improving if people believe that all the stimulus will come back. So I think that's our view, that to filter down will take some time.
And if you look through our 3 asset classes, we feel that the retail is probably the first asset class that we will be able to capture when that confidence is improving and the sentiment is improving. So being our largest asset class, contributing 70-over percent, I think what the management has been focusing to do is really to strengthen our own portfolio in terms of being able to compete, being able to put in offerings that then can capture the catchment spending power when things normalizes and improve.
So I think that's very clear what we're trying to do. Business parks and logistics, I think if you look through our year-to-date numbers, these are really the tool that are facing short-term pressure in terms of the demand supply and the rentals, and I think this sort of thing takes some time to address itself in the marketplace. Again, then it comes back to, for each of our park, we have to be a bit more targeted and focused on where we want to lease people in.
And hopefully, we are able to lease in occupiers that can partner us slightly longer, and we can ride through these market cycles better. So I think that's the approach that we are taking. Private enterprises in terms of business expansion, generally still very cautious. And I think you need to give them some time to build their confidence back and also to have that improved outlook.
Same thing for logistics. If you look at where the demand supply is, there are more supply coming onstream, more landlords chasing the limited pool of demand. I think that's where you see rental pressure coming. So I think in a nutshell, that's how we look at it and how we are trying to manage our portfolio mix such that on a relative basis, the retail resilience will help to counter the downcycle that we are facing in the business park and logistics.
Got it. Very clear. My second question is that how is the investment landscape in China at this point of time? And taking all your comments into consideration, in terms of portfolio optimization, should we expect you to divest some of the business parks and logistics and add more of retail in the medium term for CLCT? And what kind of valuation should we expect by the end of the year?
Yes. These are all very good questions that we think about all the time. I think as a REIT manager, we run a diversified portfolio of asset classes where it makes sense for us in terms of extracting value such that the overall portfolio quality can improve, our balance sheet strength can improve. I think that's how we are guided by deciding what to do with it.
I don't think we are mechanical in treating, like at this juncture, we can only sell one asset class and buy one asset class. We don't try to think from that perspective, but more so of which assets, if you look through our portfolio are noncore, for example, don't contribute a lot. And in terms of growth prospects, it's not going to be very positive.
I think those are the things that we'll be spending a lot of time to look for opportunities to monetize. In terms of valuation, I think there is definitely, in today's China market, the appetite for China assets much less compared to in the past. So a lot of potential buyers are coming more from domestic players. If you look at our 6, 7 divestments to date, they are all towards domestic buyers.
So I think that's going to be the trend that we see potentially who are buyers, the SOEs, the insurance funds. These are typically the main players looking for opportunities. In terms of valuation, generally, if you look through our portfolio, in June, we have adjusted the value of potentially our weakest asset class of logistics. We took down the valuation by about 8%.
In terms of business parks, I would say relatively speaking, our parks are healthy. If you look at the general market, we are performing much better in terms of occupancy, in terms of rent, in terms of passing. So I think business parks as a whole, I think there's less downward pressure on valuation come year-end.
Retail is where I see a mix. I mentioned if you look through our 9 malls, potentially the weaker ones, where we are having a little bit more lease churn and negative reversions are still in that cycle, those are the ones that, come year-end, we may potentially see a bit of downward revaluation.
Just to clarify, would you be adding more weightage on retail? I mean, going back to the earlier side of growing retail in the medium term, 3 to 5 years compared to other segments?
We like retail because it's an asset class that I think we have that platform strength. We have that ability to cost and manage and synergize them because of a longer track record in this space. But again, we can't just use a simple yardstick of just -- retail has to be catchment-focused, have to be very oriented and making sure that within that space that we are operating the business, we are high in the quartile of the market positioning in terms of capturing the business.
So I think we want to improve our retail quality as we reconstitute, meaning that we want smaller, older, less competitive ones out. We want more dominant one, able to capture a bigger catchment and able to allow us to inject more comprehensive offerings. So I think we are looking out for opportunities as we reconstitute. So retail continues to be asset class that we like.
Business parks, it's more driven by the cities of locations that we are in. We are also looking at opportunities to monetize some stake, for example, and working alongside the SOEs because I think in this current environment, if you can be in partnership with them, that potentially may help in terms of getting some of this business traction moving.
Logistics is our smallest asset class. I think that's an area that we have to be a little bit more mindful as we look for new opportunities to scale. The entry cost is very important, the tenant cost is very important, and understanding the competitive landscape in the location is very important. So I think that's how we look at it. We don't mechanically say that we want to buy one and sell the others. We don't look at investment from that perspective. It's driven by improving portfolio quality.
Got it. Got it. Just one last question. I think in terms of quality stimulus, especially on the property side, has there been any direct benefits in terms of taxes or something? And earlier, you mentioned that some of the tax benefits for business parks are rolling over, meaning that it's not anymore. Maybe can you give some color on this?
Yes. I think it's still early days. I think let's give the government some time to work out the specific measures. But I think generally, you would appreciate that they want to be a bit more pro business, want to be more pro consumption, meaning that they want to release more income to the household, which is why you see they have unilaterally moved down the mortgage loan financing rate.
So that is, in effect, saving the household income, right? Because they used to be paying the mortgage loan at a higher rate, but now they pay lower. So they have some disposable income from the household. So I think that the Chinese government are trying to target the various sectors in their own ways.
So on your particular question, whether we stand to benefit from any business tax, property tax, I think this is something that we're always on the ground, we're very actively in looking to see what are the tax policies they have and how we can stand to benefit, given our status. I think You Hong, if you have anything to add?
Maybe I just want to add. I think in terms of system-wide, we have not really see a lot. I think the property issues they are addressing is more on the residential side of things. But I think anecdotally, we also have certain, say for example, in cities where we carried out some of the AEI programs.
There could be cases where we qualify for incentive or rebate or certain financial benefit, which, obviously, we needed to sort of, I would say, lobby or queue with the government. I think we are seeing more -- some of this a bit bearing fruit. I think that AEI Xi'an, some of the tax benefit that we have on the business park side in terms of getting the status of incubator status, we are continuing to enjoy it. So yes, I think, hopefully, we'll get more.
So I mean the thing is there are pockets of opportunities. The Chinese government generally has certain tax incentives. So I think what is required for us is to stay very close to the ground and to interpret it and making sure that we can qualify for it and being ahead of the queue. I mean these are things that we have to do anyway, so let's hope that as they want to prime the economy up, they want to lower the business cost, tax is an area that we hope to benefit.
Thank you, Vijay. Can I pass the time to Terence, please?
The tenant sales on the whole slowdown on a Q-on-Q basis, but I see what was reported is the tenant sales for F&B, services, IT, those are up. So can you please share which trade categories went down in the quarter?
Maybe I'll answer that. I think we have seen the supermarket, some of them not delivering as good sales this quarter, especially the bigger format ones that we have seen. So I think that's one area. F&B, we see good business. The other big trade is fashion. Fashion continues to be slightly lower.
I think the trend has been there, not just this quarter. It's been there for a while. In terms of -- for example, another area that we are looking into is vehicle. It did good in some of our malls, but it did not do so good for some of our other malls, so I think it's a mixed [indiscernible]. Yes, yes. So the other area we observed a bit of year-on-year variance is in the area of, let's say, the jewelry. I think the COVID years of 2022, 2023, a lot of people are not able to travel, so they buy some of these to store as well.
So I think there was a big push to jewelry, gold during those years. But as we look into 2024, that has also tapered off a little bit. So that is an area we see a bit of year-on-year down on top of what You Hong mentioned supermarket, services. Generally, if you look at the retailers, they are slightly on a price point reduction mode. You have read a lot about it. Things that used to sell, let's say, $128, they have to price it at $88.
So all this contribute to overall the retail sales numbers slightly down. And if you look at the quarter, I would say if you benchmark ourselves with the key cities that we operate our business in Beijing, let's say, in Guangzhou, in Changsha, in Chengdu, generally, it's quite in line in the sense that the third quarter has been soft. We are also seeing similar softness. But because of some of our AEI efforts some of this trade that we have brought in and the brands we have brought in have helped to make us do better.
Okay. Just on that point, in terms of looking across the portfolio, so why is it that the Rock Square tenant sales has slowed down quite a bit, whereas if you look at, say, Grand Canyon, that's quite a bit more stable on a quarter-on-quarter basis? I imagine that Tier 1 malls, Tier 1 city malls, should generally do as well, generally speaking.
Yes. So you specifically highlighted Rock Square. Rock Square, I mentioned, is because of some softness in the vehicle sales, services sector, right? And because we are also changing some of these vehicles, some of these units within our mall, they have given us good traction in terms of rent, in terms of footfall in the last 2 years, I would say. But this cycle is also a little bit tapering, and we want to also use this cycle to inject a little bit of other offerings.
So the year-on-year drop a lot was driven by this. Cinema in the third quarter are also some of these low effect. We don't see a lot of blockbusters. At the same time, we are also taking some early actions to recover some space at some of our assets, changing the cinema operators where the week one go up, the new one comes in. We see this happening in our Xuefu. You see us recovering a bit of space from our Rock Square.
So all these actions impacted some of these sales. Even for our most dominant and top contributing season in the third quarter, sales is a bit down because precisely, we were doing a little bit of reconstitution of the food zone. So essentially, last year, this 1,007 square meters are contributing sales. But because the quarter we are doing all these changes. But this positive effect will come in from the fourth quarter onwards. So there will always be a little bit of this actions-driven asset-specific driven that add to the overall number that we report.
Thank you, Terence. We still have a little bit of time left. Do we have any other questions? Okay. If not, otherwise, thank you, Tze Wooi. Thank you, everyone, for joining us. Tze Wooi, before we go, would you like to share a few words?
No, I think we have discussed a lot. I think definitely, China market today is going through a bit of that challenge. What management are doing is really to structure our portfolio, looking through our 3 asset classes, relative strength, relative resilience, retail are leading right now. So I think that's where we're going to add more focus.
I mentioned there will be opportunities for us to do a little bit more AEI unlocking value. So that's going to take some effort and time for us to strengthen the retail. Business parks and logistics, I mean, at this juncture, we have to ride through that negative cycle, and that's where our diversified portfolio will help to counterbalance each other.
Policy measures are coming in. Interest rate reductions are coming in. We have taken early actions to improve our debt capital management. I think that early move will help us to strengthen our -- debt side of things, and I think that's a relative strength to counter some of these potential asset weakness.
So overall, I think that's where management are focusing to do, to continue to strengthen, look for opportunities to exit some of -- and monetize some of this so that we can improve the balance sheet strength. So I think these are the clear focus on management, and I'll just sum up that way. Thank you.
Thank you, everyone. I hope this discussion has offered valuable insights into our operations and future outlook. So feel free to reach out to me with any questions. Thank you, and have a good day.
Thank you.